What is referred to as the federal funds rate?

The federal funds rate is the rate at which banks lend reserves to other banks overnight. This rate is crucial in the financial system as it influences overall economic activity. When banks need to meet required reserve ratios and find themselves short on cash reserves, they borrow from other banks, and the interest rate charged for this borrowing is referred to as the federal funds rate.

This rate impacts various interest rates throughout the economy, including those for consumer loans, mortgages, and savings accounts, making it a key tool in monetary policy. Changes in the federal funds rate can affect inflation and overall economic growth. Therefore, understanding this rate and its implications is essential for comprehending how financial institutions operate and how monetary policy is formulated.

In contrast, the interest rate for customer loans refers to the specific rates at which banks lend to consumers, which are influenced by the federal funds rate but are not synonymous with it. The discount rate, set by the Federal Reserve, is the rate at which banks can borrow directly from the Federal Reserve, which again is distinct from the federal funds rate. The government bond interest rate refers to the yield on government securities, which is a different financial metric altogether.