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A term coined by rappers, meaning that the federal authorities are watching their actions, purchases, etc. Typically those whoa are being watched by the feds are making a lot of cash doing illegal activites.
"Ay man can you hook a brotha up with a car?"
"Nah bro, the feds watching"
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The police or the authorities are survailing your person
"Watch your back" , "the Feds are watching"