Federal Funds

Categories: Banking,

When banks have more cash than they're required to in their reserve accounts, they can deposit the money in a federal reserve bank or lend it to another bank overnight. That money is called federal funds, and the interest rate at which the banks lend to each other is called the federal funds rate. The term also describes money the federal reserve uses to buy government securities when it wants to take money out of circulation. It might do this to tighten the money supply in the hope of forestalling an increase in inflation.