The federal funds rate is determined by demand and supply of bank reserves.

Question

Quizplus · Accepted Answer

The federal funds rate is the interest rate that banks charge each other for overnight loans of their excess reserves. The demand and supply of these reserves determine the level of the federal funds rate. When there is excess supply of reserves, the federal funds rate decreases and when there is excess demand for reserves, the federal funds rate increases. The Federal Reserve uses open market operations to influence the supply of reserves in order to achieve its desired federal funds rate target.

The Federal Funds Rate Is Determined by Demand and Supply