Fed funds transactions can be initiated by:

• A. Only lending banks
• B. Only borrowing banks
• C. Either lending or borrowing institutions or through a broker
• D. The Federal Reserve only

Answer: (C)

The key idea is that Fed funds are an interbank, market-based loan of reserve balances, traded among depository institutions. Any bank with excess reserves can lend to a bank in need, so either the lender or the borrower can initiate a Fed funds transaction. A broker can also facilitate those trades by connecting lenders and borrowers, expanding the pool of potential counterparties. The Federal Reserve itself does not typically initiate these loans; it provides the framework and the payments system, while the actual funds are moved directly between banks (or through a broker) in the market.