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Finance Dictionary and Glossary of Investment Terms
Federal funds rate
The interest rate that banks charge each other for the use of Federal funds. It changes daily and is a sensitive indicator of general interest rate trends. The Federal funds rate is one of the of two interest rates controlled by the Fed. While the Fed can't directly affect this rate, it effectively controls it in the way it buys and sells Treasuries to banks. This is the rate that reaches individual investors, though the changes usually aren't felt for a period of time.
The interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight.
The interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed funds rate, as it is called, often points to the direction of U.S. interest rates. The most sensitive indicator of the direction of interest rates, since it is set daily by the market, unlike the prime rate and the discount rate.