Federal Funds Rate

The interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions, usually overnight. Depository institutions are required by law to maintain a certain level of vault cash and reserves with the Fed. They sometimes borrow from each other to maintain this required level of reserves. When banks borrow from each other, the interest rate is negotiated between them. The federal funds effective rate is the weighted average of this rate across all such transactions.