Federal Funds Rate

An overnight ultra-short-term interest rate

The interest rate that various banks in the United States pay when borrowing emergency funds from neighboring banks is called the Federal Funds Rate.

If the federal funds rate is high, the interest rates ordinary citizens pay when borrowing money from banks also rise. This is because a bank that borrows money from a neighboring bank at 5% interest cannot lend money to ordinary citizens at 1% interest.

However, if the federal funds rate falls, ordinary citizens can borrow money at the correspondingly lower rate.

So the Fed, which has a great interest in the prosperous lives of the people, watches the federal funds rate with special affection.

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Topics: interest
Category: Wiki/Economy