Federal Funds

Summary of Federal Funds

Commercial bank reserves in excess of legally required reserves that are offered to other banks that are suffering temporary reserve deficiencies. These loans are for very short periods, usually overnight. Banks with funds in excess of requirements offer them to banks with deficiencies through a few large banks and several nonbank firms that serve as Federal funds dealers. The rate a borrowing bank pays for these funds is the Federal fund rate; it represents the rate at which banks lend funds to one another.

(Main Author: William J. Miller)