Legal Definitions - federal-funds rate

Definition: The federal-funds rate is the interest rate at which banks lend to each other overnight. This means that banks with excess reserves lend money to those with temporarily insufficient reserves. It is also known as the fed-funds rate and is often shortened to fed funds.

• When Bank A has excess reserves, it can lend money to Bank B overnight at the federal-funds rate.
• The Federal Reserve sets a target for the federal-funds rate, which can influence other interest rates in the economy.

These examples illustrate how the federal-funds rate works. Banks with excess reserves can earn interest by lending to other banks with temporary shortages of reserves. The Federal Reserve can also use the federal-funds rate to influence the overall level of interest rates in the economy.