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Overnight federal funds transactions under a continuing contract are
renewed automatically until termination by either the lender or the
borrower. This type of agreement is used most frequently by correspondent
banks that borrow overnight federal funds from a respondent bank.
Unless notified by the respondent to the contrary, the correspondent will
continually roll the InterBank deposit into federal funds, creating a
longer-term instrument of open maturity. (Correspondent banks are
typically larger institutions that provide services, such as managing
funds, to smaller, respondent banks.)
By facilitating the transfer of the most liquid funds between depository
institutions, the federal funds market plays a major role in the execution
of monetary policy. The interest rate on federal funds, the federal funds
rate, is highly sensitive to Federal Reserve open market operations that
influence the supply of reserves in the banking system.
For example, if the Federal Reserve wishes to decrease the federal funds
rate, it may purchase U.S. Treasury securities in the open market, thereby
increasing the availability of bank reserves and putting downward pressure
on the federal funds rate. Sales of Treasury securities by the Fed in the
open market tend to have the opposite effect.
Federal Funds Rate History: For Historical Reference Only: Rates and
explanations provided by the Federal Reserve System. Accuracy of our
information is not guaranteed. Some rates are rounded due mid-month
changes or may contain typographical errors. If you find a
typographical error in the rate table let us know.
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