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In the United States
United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
, federal funds are overnight borrowings by banks
Bank

A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
 to maintain their bank reserves
Bank reserves

Bank reserves are banks' holdings of deposit accounts in accounts with their central bank , plus currency that is physically held in bank vaults ....
 at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirement
Reserve requirement

The reserve requirement is a bank regulation that sets the minimum bank reserves each bank must hold to customer Deposit account and Promissory note....
s and to clear financial transactions. Transactions in the federal funds market enable depository institutions
Bank

A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
 with reserve balances in excess of reserve requirements
Excess reserves

In banking, excess reserves are bank reserves in excess of the reserve requirement set by a central bank . They are reserves of cash more than the required amounts....
 to lend reserves to institutions with reserve deficiencies. These loans are usually made for one day only, that is, "overnight".






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In the United States
United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
, federal funds are overnight borrowings by banks
Bank

A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
 to maintain their bank reserves
Bank reserves

Bank reserves are banks' holdings of deposit accounts in accounts with their central bank , plus currency that is physically held in bank vaults ....
 at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirement
Reserve requirement

The reserve requirement is a bank regulation that sets the minimum bank reserves each bank must hold to customer Deposit account and Promissory note....
s and to clear financial transactions. Transactions in the federal funds market enable depository institutions
Bank

A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
 with reserve balances in excess of reserve requirements
Excess reserves

In banking, excess reserves are bank reserves in excess of the reserve requirement set by a central bank . They are reserves of cash more than the required amounts....
 to lend reserves to institutions with reserve deficiencies. These loans are usually made for one day only, that is, "overnight". The interest rate at which these deals are done is called the federal funds rate
Federal funds rate

In the United States, the Fed Funds Rate is the interest rate at which private depository institutions lend balances at the Federal Reserve to other depository institutions, usually overnight....
.

Federal funds transactions neither increase nor decrease total bank reserves. Instead, they redistribute reserves and enable otherwise idle funds to yield a return. Banks may borrow these funds to avoid an overdraft (that is, the balance going below zero) of their reserve account, or in order to meet the reserves required to back their deposits. Federal funds are definitive money, meaning that they are available for immediate spending, while checks and many other forms of money must be cleared by banks and typically take several days before becoming available for spending.

Participants in the federal funds market include commercial bank
Commercial bank

A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. It is a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits....
s, savings and loan association
Savings and loan association

A savings and loan association, also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage loans....
s, government sponsored enterprises, branches of foreign banks in the United States, federal agencies
List of United States federal agencies

This is a list of Government agency of the United States federal government.The Executive of the federal government includes the Executive Office of the President of the United States and the United States federal executive departments ....
, and securities firms. Many relatively small institutions that accumulate reserves in excess of their requirements lend reserves overnight to money center and large regional banks, as well as to foreign banks operating in the United States. Federal agencies also lend idle funds in the federal funds market.

See also

  • Repurchase agreement
    Repurchase agreement

    A Repurchase agreement allows a borrower to use a security as collateral for a cash loan at a fixed rate of interest. In a repo, the borrower agrees to immediately sell a security to a lender and also agrees to buy the same security from the lender at a fixed price at some later date....
  • Federal aid, which is commonly referred to as federal funds.
  • compare and contrast with Discount Rate
    Discount rate

    File:Bundesbank discount rate 1948 to 1998 fill grid.svgThe discount rate is an interest rate a central bank charges depository institutions that borrow reserves from it....
  • Fed Funds Probability
    Fed Funds Probability

    Fed Funds Probability is the probability of Federal Reserve actions at upcoming Federal Open Market Committee meetings. At every meeting of the FOMC, its members decide whether to increase, decrease, or leave the Federal funds rate unchanged after reviewing the economic conditions in the United States....


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