This rate refers to the interest that banks charge other financial institutions for lending them excess cash from their reserve balances overnight. <\/b><\/p>\n

According to the law, banks must maintain a reserve that is equal to a certain percentage of their deposits in an account with the Federal Reserve Bank. <\/b><\/p>\n

The amount of money a bank must keep in its Federal Reserve Bank account is called the minimum reserve requirement and is based on a percentage of the lender\u2019s or the bank\u2019s total deposits.<\/b><\/p>\n

Banks and lenders are required to maintain money-making accounts with the FED banks to ensure they have enough cash to cover deposits and other liabilities. <\/b><\/p>

Any money in their reserve that exceeds the required level is available for borrowing from other banks that may be falling short of finances.<\/b><\/p>\n

The end-of-the-day balances in the lender’s or the bank account averaged over two-week reserve maintenance periods are used to determine whether it meets its minimum reserve requirements. <\/b><\/p>

If the bank has a balance of more than the minimum required reserves in the account, the additional reserves could be used for lending to other financial institutions that are expecting a shortfall of funds. <\/b><\/p>

For this overnight transaction between two banks, the lending bank will charge an interest rate based on the Fed funds rate.<\/b><\/p>\n

The Federal Open Market Committee decides about rate adjustments based on important economic signals that may show signs of recession, inflation, or other problems that can affect sustainable economic development. <\/b><\/p>

The signals may include factors like the durable goods orders report and the core inflation rate.<\/b><\/p>\n

The index for the federal funds rate has changed widely over the years in response to the different economic conditions. Due to inflation in the 1980s, the fed fund rate was set as high as 20%. <\/b><\/p>

While during The Great Recession of 2007 to 2009, the rate dropped to a record low target of 0% to 0.25% in an attempt to motivate economic development.<\/b><\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t