BANKING AFFAIRS

Detailed explanation-1: -In borrowing and lending of federal funds, federal funds rate is result of function between supply and demand. The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis.

Detailed explanation-2: -The Federal funds market refers to the borrowing and lending of a special kind of money-deposit balances in the Federal Reserve Banks-at a specified rate of interest. Such transactions are com-monly referred to in the financial markets as purchases and sales of Federal funds.

Detailed explanation-3: -The fed funds rate is the interest rate that depository institutions-banks, savings and loans, and credit unions-charge each other for overnight loans. The discount rate is the interest rate that Federal Reserve Banks charge when they make collateralized loans-usually overnight-to depository institutions.

Detailed explanation-4: -The Federal Open Markets Committee (FOMC) sets the federal funds rate-also known as the federal funds target rate or the fed funds rate-to guide overnight lending among U.S. banks. It’s set as a range between an upper and lower limit. The federal funds rate is currently 4.50% to 4.75%.

Detailed explanation-5: -If the federal funds rate was below the level the Federal Reserve had targeted, the Fed can sell bonds to the banking system to raise the federal funds rate to the set target. Selling bonds to the banking system reduces the reserves which in turn reduces the money supply and the federal funds rate increases.