Respuesta :
Increasing the cost of credit through the funds rate Curbs demand and helping reduce inflationary pressures in the short run. The federal funds rate is one of the most closely watched economic indicators in the United States.
What are Federal Funds
Federal funds, often referred to as fed funds, are excess reserves held by commercial banks and other financial institutions in regional Federal Reserve banks; these funds can be loaned, in turn, to other market participants with insufficient cash to meet their loan and reserve needs. The loans are unsecured and are made at a relatively low interest rate, called the federal funds rate or overnight rate, because that is when most loans are made.
Important point:
- Federal funds refer to excess reserves held by financial institutions, over and above the central bank's mandated reserve requirements.
- Banks would borrow or lend their excess funds to one another overnight, as some banks found themselves with too many reserves and others too little.
- The federal funds rate is a target set by the central bank, but the actual market rate for federal funds reserves is determined by the overnight interbank lending market.
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