Federal funds

Banks may borrow these funds in order to meet the reserves required to back their deposits.

Participants in the federal funds market include commercial banks, savings and loan associations, government-sponsored enterprises, branches of foreign banks in the United States, federal agencies, and securities firms.

Many relatively small institutions that accumulate reserves in excess of their requirements lend reserves overnight to money centers and large regional banks, as well as to foreign banks operating in the United States.

The Fed, which is the central bank of the United States, conducts monetary policy primarily by targeting a certain value for the federal funds rate.

If the Fed wishes to move to, for example, a more expansionary monetary policy, it conducts open market operations, which include primarily bank reserves; since this puts more liquidity into the banking system, it pushes down the federal funds rate.