FED FUNDS TARGET RATE
Release Date: Changes Decided during FOMC Meetings
Release Coverage: Current Target
Released by: Federal Reserve Board
Current Target: http://www.federalreserve.gov/fomc/fundsrate.htm
Daily Rates: http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm
The federal funds target rate is the interest rate at which banks lend excess reserves (federal funds) at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. It is considered the most sensitive indicator of interest rate direction.
The federal funds target rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. The Target Federal Funds Rate is set by the Federal Open Market Committee (FOMC). By setting a federal funds target rate and using the tools of monetary policy, open market operations, discount window lending, and reserve requirements to achieve that target rate, the Federal Reserve and the FOMC seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates," as required by the Federal Reserve Act.
WHAT DR. ED SAYS:
Federal funds target rates are closely associated with a balance between growth and inflation. Consider the amount of loans that banks should be willing to approve; as the rate at which the bank borrows money is considerably cheaper, this can be translated to the consumer. Keeping that in mind, the cheaper it may be to obtain money indicates a greater risk of inflationary pressure. The duty of the Federal Reserve and FOMC is to balance growth and inflation through the changing rates.
The opposite is true when the FOMC raises rates. Banks are less willing to borrow money to meet their reserve requirements, which means more money within the bank's brick and mortar must be set aside to meet the requirement. As more money is allocated to the requirements, less is available to stimulate growth through loans, potentially slowing your loan portfolio's growth.