To the rescue comes Mega Bank.

Mega Bank has sufficient excess reserves that it lends $300,000 in reserves to Your Bank and to Other Bank ($150,000 each) on an overnight basis. Because the Fed bases reserve requirements on weekly calculations, the parties to this transaction all assume that the two borrowing banks will make other adjustments that will bring them into compliance for the coming week.

The Fed transfers the $300,000 in reserves from the account of Mega Bank to the separate accounts of Your Bank and Other Bank ($150,000 each). The Fed plays no other role in Fed Funds transactions.

Again, to influence Fed Funds interest rates the Fed buys or sells securities through the FOMC in separate transactions. (We will look at the operation of the FOMC later.) The level of reserves in the system have a large influence the rates at which banks do business with each other. The Fed, however, does not control either total reserves nor interest rates.