Legal Definitions - fed-funds rate

Fed-Funds Rate

The Fed-Funds Rate is the interest rate at which banks lend and borrow money from each other overnight to meet their reserve requirements. It is set by the Federal Reserve and is used as a tool to control the money supply and stabilize the economy.

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 rate can fluctuate depending on the supply and demand of funds in the market and the Federal Reserve's monetary policy decisions.

Another example is when the Federal Reserve lowers the Fed-Funds Rate to stimulate economic growth. This makes it cheaper for banks to borrow money, which in turn encourages them to lend more to businesses and consumers, leading to increased spending and investment.

The Fed-Funds Rate is an important tool used by the Federal Reserve to influence the economy. By adjusting the rate, the Fed can encourage or discourage borrowing and spending, which can have a ripple effect on the overall economy. The examples illustrate how the rate is used by banks to meet their reserve requirements and how it can be used to stimulate economic growth.