The Federal Funds rate is defined as:

• A. The interbank interest rate at which banks borrow and lend to each other
• B. The rate charged by the Fed for lending to consumers
• C. The interest rate on mortgage loans
• D. The rate paid on Treasury deposits

Answer: (A)

The key idea here is the rate used for overnight borrowing of reserve balances between banks. The federal funds rate is the interest banks charge each other for these overnight loans of reserves held at the Federal Reserve. It acts as the monetary policy anchor that the Fed targets through open-market operations, so the actual rate moves around the target as banks’ reserve positions change.

This rate isn’t what the Fed charges consumers, nor is it a mortgage rate, nor is it the rate on Treasury deposits. Mortgage and consumer loan rates are determined by lenders and borrowers in the market, and the Treasury deposit rate would relate to government deposits, not interbank borrowing of reserves.