The federal funds market:

Question

Quizplus · Accepted Answer

The federal funds market is an inter-bank market where banks with excess reserves (reserves in excess of the required reserve ratio) can lend to other banks that are short on reserves. This market helps banks manage their short-term liquidity needs. The Federal Reserve can also participate in this market, primarily as a way to implement monetary policy by influencing short-term interest rates. Option A is incorrect because bank borrowing from the Federal Reserve is not specific to inter-bank lending. Option B is incorrect because the U.S. Treasury does not typically lend to banks in times of liquidity emergencies, but rather may provide emergency funds through financial institutions like the Federal Reserve or the Troubled Asset Relief Program. Option D is incorrect because the federal funds market refers specifically to lending between domestic banks, not borrowing by American banks from foreign lenders.

The Federal Funds Market