Federal funds rate - Financial definition
Financial acronyms
The entire acronym collection of this site is now also available offline with this new app for iPhone and iPad.
Concise definition of the term Federal funds rate
The federal funds rate is the interest rate at which banks in the United States lend each other balances held at the Federal Reserve, called fed funds, generally overnight and without collateral. The fed funds rate is an important reference rate in the financial markets.
Comprehensive definition of the term Federal funds rate
Unlike European central banks, for example, the United States Federal Reserve does not pay interest on minimum reserves which has led to the creation of a veritable secondary market for these funds.
The fed funds rate is not explicitly fixed by the American central bank, but results rather from offer and demand. However, the Federal Reserve does have a periodically reviewed target federal funds rate,
and it influences the actual fed funds rate to move it towards the target rate via open market operations.