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(FINANCE) the rate at which Federal Reserve System member banks lend reserves to each other. It is the one interest rate actually set by the Federal Reserve Board. The other rates, such for treasury securities, are set by auction.

Bank reserves are a fixed percentage of deposits held in reserve against sudden demand by the depositor. In some cases bank reserves take the form of deposits with a Federal Reserve Bank, like the Federal Reserve Bank of New York.* Such deposits do not earn interest for the member bank, unless they are re-lent out at the federal funds rate.

"Federal funds" refers to emergency lending (overnight) among member banks so that the borrower can meet its reserve requirements. Reserves may include deposits with a Federal Reserve Bank which can be loaned by the member bank to another member bank (thereby earning interest).
* Member banks in the FRS are regular national/state chartered banks, or investment banks. The FRS itself includes 12 Federal Reserve Banks, which actually do the financial work of the FRS.
The European version of the federal funds rates is the London interbank offered rate (LIBOR).
by Abu Yahya September 03, 2010
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