In light of the (very) recent Federal Reserve decision of once again lowering interest rates, after a long break, many of you might be wondering how this "central bank interest rate thingy" actually work.
Therefore, this video will focus exclusively on explaining what the federal funds rate (also called fed funds rate) is all about.
Simply put, the federal funds rate is an interest rate set by the central bank of the United States (the Federal Reserve), a rate at which it believes banks should lend to one another. With "believe" being the operative word here, since the Federal Reserve is not able to force commercial banks to lend to one another at the federal funds rate.
Still, it has tools at its disposal to increase the likelihood that bank to bank lending rates end up being in the federal funds rate zone. Why it chooses to increase or decrease the fed funds rate is a topic for a later video. For now, it makes sense to simply understand how it works.
In just a minute, I've explained the federal funds rate in a way which hopefully makes it clear what the Federal Reserve can and can't do when it comes to this tool :)
