Federal Funds Rate

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This is the interest rate charged by a depository institution (essentially banks and savings and loans) to another depositary institution for the overnight sale of funds. Although the Federal Reserve Board (the "Fed") strictly speaking does not control this rate, it "sets a target" for the rate. In practice if the Fed sets a higher target rate, it means that many interest rates throughout the financial system will edge up, and if the target rate set is lower, then rates will edge down. Rates typically most affected will be those on credit cards and home equity loans. Interest rates on mortgage loans are usually not immediately affected by a change in the federal funds rate; these rates are linked more to U.S. government securities such as the ten-year treasury note, although mortgage rates are also affected by other factors. When people talk about "interest rates going up," they usually mean the federal funds rate. Broadly speaking, the Federal Reserve Board will raise the federal funds target rate when it feels the economy is growing too quickly and there is a threat of inflation; conversely, if it feels the economy needs stimulating it might reduce the federal funds rate, which makes the cost of borrowing money lower. Because raising and lowering (or leaving unchanged) the federal funds rate has such a wide-ranging impact, the decision - made by the Fed every six weeks or so - is very closely watched. See also Prime.