The federal funds rate is the interest rate in the American interbank lending market. The most important thing is the overnight lending rate. This interest rate change can sensitively reflect the surplus and shortage of inter-bank funds. The directional adjustment of interbank lending rate by the Federal Reserve can directly affect the capital cost of commercial banks and transfer the surplus and deficiency of funds in the interbank lending market to industrial and commercial enterprises, thus affecting consumption, investment and national economy. The most frequently quoted interest rate in the federal funds market is the effective federal funds rate.

The member banks of the Federal Reserve System (Fed) lend each other the federal funds rate to adjust the reserve position and daily liquidation. According to the regulations, member banks must maintain a certain amount of reserves within two weeks with Wednesday as the end date. Federal funds consist of excess reserves plus surplus from bill settlement. Due to frequent changes in the balance of deposits, the reserves of member banks may be surplus or insufficient. If the reserve is insufficient, the bank can borrow from the federal fund to make up the reserve amount, or use it to clear the difference in bill exchange. The way is to transfer interest to each other through the Fed account, and remit the interest within the agreed time or settle the interest with the principal at any time.

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