Interest Rates (Federal Funds Overnight Rate)

Sunday, Oct 11, 2009

When someone talks about the Federal Reserve changing the "interest rate," it is actually just changing the Federal Funds Overnight (FFO) rate, which indirectly impacts other market interest rates and the supply of money:

Open market operations are the Federal Reserve’s principal tool for implementing monetary policy. These purchases and sales of U.S. Treasury and federal agency securities largely determine the federal funds rate—the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The federal funds rate, in turn, affects monetary and financial conditions, which ultimately influence employment, output, and the overall level of prices.

Open Market Operations in the 1990s, Cheryl Edwards, The Federal Reserve, November 12, 1997, http://www.federalreserve.gov/pubs/bulletin/1997/199711lead.pdf.

Federal funds effective rate, The Federal Reserve, http://www.federalreserve.gov/releases/h15/data/Businessday/H15FF_O.txt (OOo Spreadsheet).