federal funds rate

(FINANCE) the rate at which Federal Reserve System member banks lend reserves to each other. It is the one interest rate actually set by the Federal Reserve Board. The other rates, such for treasury securities, are set by auction.

Bank reserves are a fixed percentage of deposits held in reserve against sudden demand by the depositor. In some cases bank reserves take the form of deposits with a Federal Reserve Bank, like the Federal Reserve Bank of New York.* Such deposits do not earn interest for the member bank, unless they are re-lent out at the federal funds rate.

"Federal funds" refers to emergency lending (overnight) among member banks so that the borrower can meet its reserve requirements. Reserves may include deposits with a Federal Reserve Bank which can be loaned by the member bank to another member bank (thereby earning interest).
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* Member banks in the FRS are regular national/state chartered banks, or investment banks. The FRS itself includes 12 Federal Reserve Banks, which actually do the financial work of the FRS.

The European version of the federal funds rates is the London interbank offered rate (LIBOR).

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Federal Funds Rate

The interest rate at which banks lend to each other overnight when the bank manager accidentally spent too much of the deposits on yachts and mansions. The Fed attempts to influence this in order to set interest rates for monetary policy, but unfortunately nobody gives a shit about what Jerome Powell thinks.

Bob illegally spent $500 million of customer deposits on luxury yachts a private island in the Bahamas. He had to borrow extra money at a Federal Funds rate of 5%, to meet the liquidity requirements.