Tags: Money | Federal Reserve | federal funds rate

Seven Things You Need to Know About The Federal Funds Rate

By    |   Tuesday, 14 July 2015 10:19 PM

Economists, financial analysts and investors are keeping an eye on the Federal Reserve as Chairwoman Janet Yellen reaffirmed in July that the central bank plans to start raising the federal funds rate this year. The move is anticipated as an indicator of the stability of the U.S. economy, and Yellen cautioned that it could be delayed or accelerated, as the economic outlook remains uncertain, The Wall Street Journal reported.

Here are seven things you should know about the federal funds rate.

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1. The federal funds rate is the rate of interest at which banks lend money to one another on a very short-term basis — often overnight — using funds that are stored inside Federal Reserve banks.

2. The law requires banks to set aside a portion of their customers' deposits as reserves to prove they're solvent.

3. Banks whose reserves slip below the required percentage borrow from other banks with reserve surpluses. The federal funds rate on any given day is a weighted average of the interest charged and paid by the banks that are lending and borrowing these reserves.

4. The Federal Reserve meets every seven weeks or so to set a target federal funds rate, a range inside of which it wants the banks to do these overnight transactions.

5. This all matters because the Fed's basic job is to use the levers of monetary policy — including tweaks to interest rates — to help keep the economy humming along without overheating. By raising the target rate, for example, the Fed is essentially encouraging financial institutions to charge more for financial products such as home loans and credit cards. This is one way the Fed tries to keep inflation in check.

6. "The current Fed funds rate is effectively zero," Kimberly Amadeo wrote at About.Com, and it has been since the financial crisis of 2008, when the Fed, under then-Chair Ben Bernanke, pushed the rate almost to the floor to keep borrowing cheap and help keep the endangered U.S. economy afloat.

7. The federal funds rate could start climbing again in 2015 after its long period of dormancy, since current Federal Reserve Chair Janet Yellen has indicated that the economic recovery appears strong enough to warrant interest rate hikes.

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Economists, financial analysts and investors are keeping an eye on the Federal Reserve as Chairwoman Janet Yellen reaffirmed in July that the central bank plans to start raising the federal funds rate this year.
Federal Reserve, federal funds rate
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2015-19-14
Tuesday, 14 July 2015 10:19 PM
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