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Federal Funds |
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This article is from the Investing Articles: Bonds series.
Almost all banks are members of the Federal Reserve system. The Federal Reserve requires banks to keep a certain percentage of their assets on deposit with the Federal Reserve bank which covers their geographic area.
Banks loan out the majority of the money depositors put in them. But they are not allowed to loan out all of it. On a daily basis, the amount of money the bank has on deposit with the Federal Reserve may fluctuate above and below the amount they actually need to keep on deposit. When the amount on money on deposit with the Federal Reserve is greater than the amount the bank needs to keep on deposit, this money is referred to as 'Excess Reserves'. When the bank has less than is required to be kept on deposit with the Federal Reserve, the bank must borrow money to put on deposit.
Because banks do not earn any interest on the money they have on deposit with the Federal Reserve, they gladly loan out their excess reserves to other banks who need to add money to their reserves. The lending banks charge interest for this service. The lending which goes on between banks with their Federal Reserve funds is known as 'Federal Funds Lending'. The rate of interest they charge is known as the 'Federal Funds Rate' or Fed Funds Rate. It is possible for the lending bank to loan the money for longer periods of time than one day. However, almost all the federal funds lending is for one overnight period.
Continue to:
bonds, convertible bonds, federal funds, glossary, foreign currency, municipal, government, savings, tax exempt, yeilds, US Treasure bonds, financial information, investing, investment tools, reference
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