Term Fed Funds

Financial institutions, like banks, often borrow from each other overnight. Every day, they’re on the hook to make sure they have enough reserves on hand, in order to fulfill the required reserve minimums. (Banks are legally required to have a certain percentage of liquidity on hand compared to what’s being lent out, in the interest of consumer protection.) But sometimes overnight loans just doesn’t cut it. When a bank needs a loan for more than a day, they’ll probably head over to the Federal Reserve, or a big bank, for term fed funds.

Term federal funds are funds that financial institutions can borrow from the Fed (or another financial institution) for up to 90 days. The rate is usually pretty low, but not always. It depends on what the federal funds rate at the time is, which is the rate at which banks lend and borrow from each other. The FOMC, the Federal Open Market Committee, decides what the fed funds rate should be, with the potential for it to change 8x per year.

If the loan is interbank, rather than via the Fed, the contract has to be laid out a certain way, according to the Fed’s rules...the way Papa Fed would do it.