Federal Funds: Instrument of Federal Reserve Policy
Economic Review, Vol. 72, No. 5, September/October 1986, pp. 3-11
9 Pages Posted: 25 Oct 2012
Date Written: 1986
Federal funds are the heart of the money market in the sense that they are the core of the overnight market for credit in the United States. Moreover, current and expected future interest rates on Federal funds are the basic rates to which all other money market rates are anchored. Understanding the Federal funds market requires, above all, recognizing that its general character has been shaped by Federal Reserve policy. From the beginning, Federal Reserve regulatory rulings have encouraged the market’s growth. Equally important, the Federal funds rate has been a key monetary policy instrument. This article explains Federal funds as a credit instrument, the funds rate as an instrument of monetary policy, and the funds market itself as an instrument of regulatory policy.
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