Fed Funds Explained

In spite of the number of references made to the Fed funds market, I believe most people don't fully understand how it operates. I will try to clear up some of that confusion.

"The federal funds rate is an interest rate at which depository institutions lend balances to each other overnight.
The Federal Open Market Committee establishes the target rate for trading in the federal funds market."

Federal Reserve Bank of New York

The federal funds rate is one of the most influential interest rates in the U.S. economy, since it affects monetary and financial conditions, which in turn have a bearing on key aspects of the broad economy including employment, growth and inflation.

from: Investopedia

I have provided these quotes as examples of the generalized statements we read or hear about the fed funds rate, but you will have a difficult time finding information to flesh out these generalities in order to judge for yourself whether the fed funds rate really "affects monetary and financial conditions."

In the presentation below I have attempted to show how the fed funds market operates, what influences the fed funds rate, and how fed funds and fed funds rates relate to general financial markets.

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