GLOSSARY OF TERMS
The current economic crisis has brought these esoteric terminology into mainstream conversation.
| TERMS | | Federal Funds Rate | | |
The Federal Funds Rate is the interest rate that banks charge other banks when lending each other money. The Federal Reserve sets this rate.
Banks have strict reserve limits, which in the course of business may be overreached, triggering a need to borrow money from other banks in order to boost their reserves.
Federal Funds are equivalent to the extra cash that banks have and deposit at the Federal Reserve and at other banks. Overnight deposits of Federal Funds are actually overnight loans of cash between and amongst the Federal Reserve and its member banks. The true Federal Funds rate is the annualized overnight rate at which institutions borrow and lend their excess cash to each other.
The Federal Funds Rate should not be confused with the Federal Discount Rate, which is the interest rate that the Fed charges when lending money directly to the banks. The Federal Discount Rate is higher than the Federal Funds Rate so it’s used as a last resort for banks in need of additional cash.
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