Federal Funds

What are Federal Funds?

Federal Funds are excess cash reserves that banks deposit at Federal Reserve banks. Federal funds are used to lend to other banks that do not have sufficient reserves. These loans are made at a reasonably low interest rate and generally have a short duration, which is called the federal funds rate (overnight rate).

Uses for Federal Funds

When federal funds are available to be borrowed, credit is easy to obtain and as such the credit market is considered healthy. When federal funds become more difficult to obtain, then credit is considered to be tight.

Risks of Federal Funds

Nearly every financial market is affected directly or indirectly by the Federal Funds rate. Trading the futures on Federal Funds should only be done by experienced investors or with professional advice.

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