Federal Funds

Term federal funds are sums that banks borrow from other banks’ surplus reserves via the Federal Reserve System for periods longer than one day.The majority of government funds borrowed are for overnight loans that must be paid back the next day, but occasionally a bank may desire to lock in a longer term on those funds.

Banks are more likely to borrow term federal funds if they expect to have ongoing liquidity needs and an increase in the overnight federal funds rate.Federal funds are borrowed by banks under term federal fund loans for terms ranging from two days to one year.The majority of federal money operations typically do not include term federal funds. When banks foresee continued funding requirements and expect the fed funds rate to increase, they are more inclined to look for term fed funds.

Transactions involving government funds happen between two big banks or other financial institutions. A contract outlines the parameters of the arrangement and specifies the terms of repayment as well as the fixed interest rate of borrowing. The agreement may also specify whether or not the lender may call in the loan before it matures and whether the borrowing bank may make early repayments.