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Simple English definitions for legal terms
fed funds
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A quick definition of fed funds:
Term: FED FUNDS
Definition: Fed funds refer to the money that banks lend to each other overnight to meet their reserve requirements. The interest rate at which these transactions occur is called the federal funds rate. This rate is set by the Federal Reserve and is used as a tool to control the money supply and stabilize the economy. Essentially, the fed funds market is where banks borrow and lend money to each other to maintain their required reserves and keep the financial system functioning smoothly.
A more thorough explanation:
Fed Funds
Fed Funds refer to the Federal Funds Rate, which is the interest rate at which banks lend and borrow money from each other overnight to meet their reserve requirements set by the Federal Reserve.
For example, if Bank A has excess reserves and Bank B needs to borrow money to meet its reserve requirements, Bank B can borrow from Bank A at the Fed Funds Rate. The Fed Funds Rate is set by the Federal Reserve and is used as a benchmark for other interest rates, such as the Prime Rate and the LIBOR.
Another example is when the Federal Reserve wants to increase the money supply in the economy, it can lower the Fed Funds Rate, making it cheaper for banks to borrow money and increasing the amount of money available for lending.
The examples illustrate how the Fed Funds Rate works and its importance in the banking system and the economy. Banks use the Fed Funds Rate to manage their reserves and meet their obligations, while the Federal Reserve uses it to influence the money supply and the overall level of economic activity.