Federal funds are reserve balances that private banks in the U.S. hold at Federal Reserve banks. These funds are used for various types of inter-bank transactions, including lending to other banks that have insufficient reserves.
The Federal Funds Rate is the interest rate at which depository institutions (such as banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. This rate is pivotal in the financial system as it influences many other interest rates, such as those for savings accounts, loans, and mortgages, and it's a key indicator of monetary policy direction in the United States.
