Definition
The interest rate the Fed pays banks on the money they keep in their accounts at the Fed.
The story
Why would a bank lend overnight for less than the Fed will pay it to sit still? It won't. By setting this rate, the Fed gives banks little reason to lend for much less, which helps keep the fed funds rate inside its target range.
Why markets watch it
It's one of the main levers that steers the fed funds rate.
Connects to
We explain why it moves markets. What you do with it is your call. Commentary and education only. Not financial advice. All terms