Federal funds rate

The federal funds rate is the interest rate on overnight, unsecured US-dollar borrowing by depository institutions from other depository institutions and certain other entities, chiefly government-sponsored enterprises. It is central to US monetary policy, but “the Fed funds rate” can mean either the policy target range or the observed market benchmark. Quant work must identify which series is being used. New York Fed definition.

The target is an objective; the EFFR is a measurement. The target range is also not a requirement that every individual trade occur inside it. Policy implementation.

Suppose, fictionally, the target is 4.00–4.25% per year and the observed EFFR is 4.10%. The EFFR is inside the band: 10 basis points above its lower edge and 15 basis points below its upper edge. The range midpoint is 4.125%, which is neither a separately observed transaction rate nor a promise that the EFFR will equal it.

The EFFR is a volume-weighted median of overnight federal funds transactions reported through the FR 2420 collection. It is not a volume-weighted mean. Sort transactions by rate, accumulate their dollar volumes and locate the rate at the middle dollar of volume; the published result is rounded to the nearest basis point. New York Fed methodology.

The middle dollar lies in the 4.10% group, so the weighted median is 4.10%. The weighted mean would instead be 4.11%: multiplying each rate by its volume share and adding gives $4.05\%\times0.20+4.10\%\times0.60+4.20\%\times0.20=4.11\%$. Both statistics use volumes, but they answer different questions. This illustration explains the estimator, rather than reproducing the full reporting and data-quality process.

In the Fed’s ample-reserves framework, interest on reserve balances (IORB) is the primary administered rate used for short-rate control. Eligible institutions can earn IORB by holding reserve balances, which influences the rates they will accept from private borrowers. Access matters: not every money-market lender can earn IORB, so it should not be interpreted as a mechanically inviolable lower bound on every trade. New York Fed implementation framework.

Overnight reverse repurchase agreement operations (ON RRP) provide an alternative overnight investment to eligible counterparties, including participants without access to IORB. The Federal Reserve describes ON RRP as a supplementary tool for keeping the federal funds rate in the target range. Federal Reserve Board explanation.

The New York Fed normally publishes the prior business day’s EFFR at approximately 9:00 a.m. Eastern Time. A backtest must respect that availability time, plus any subsequent revision, rather than treating the observation as known during the transactions it summarises. Publication and revision rules.

EFFR is an unsecured overnight benchmark. SOFR measures Treasury-secured overnight repo financing, so the two are not interchangeable just because both respond to Fed policy. SOFR definition. Nor is an overnight observation a complete risk-free rate curve for pricing cash flows across maturities. In a dataset, preserve the benchmark name, transaction date, publication timestamp and units alongside the number.