The Federal Funds Rate is a tool central banks use to regulate the amount of money in circulation. The Fed also uses it as a way to control inflation and deflation, which can be caused by either too much or too little cash. This post will provide an example of how the Federal Funds Rate works, and why understanding this important financial concept is crucial for your success! Every day, banks must keep a certain amount of cash in reserve. These are called reserves and if they don’t have enough on hand the bank is penalized by the Federal Reserve System (Fed). The Fed also wants to make sure that there’s an adequate supply of money circulating so it can control inflation or deflation. So when someone deposits $100 into their checking account at Bank A, then Bank B may not be able to check this new deposit because its own reserves might already be insufficient. There needs to be a way for both banks’ balance sheets to remain balanced! That’s where the federal funds system comes in.. The mechanics behind how these rates work can seem complex but really understanding them will help you succeed financially. For
