Federal funds refer to the reserves deposited by American commercial banks in the Federal Reserve Bank (that is, the central banking system), including statutory reserves and funds exceeding the reserve requirements. These funds can be lent to other member banks to meet their demand for short-term reserves. The loan interest rate, known as the federal funds rate, is one of the two benchmark interest rates in the United States, and the other benchmark interest rate is the discount rate.

One reason why Bank of America wants to borrow in the federal funds market is that it may find that its deposits in the Federal Reserve System have fallen below the statutory deposit reserve requirements. Therefore, it can borrow this deposit from another bank, and the other bank transfers the funds to the borrowing bank through the electronic transfer system of the Federal Reserve System. This market is very sensitive to the credit demand of banks. Therefore, the interest rate of such loans, that is, the federal funds rate, is a "barometer" reflecting the tightness of the credit market and the monetary policy of the banking system.