What Is the Federal Funds Rate?
The Federal Funds Rate is defined as a target set by the Federal Open Market Committee as the rate at which commercial banks can borrow and lend money reserves to each other on an overnight basis. The Federal Open Market Committee is the policy-making arm of the Federal Reserve and is responsible for setting the Federal Funds Rate eight times each year.
How the Federal Funds Rate Works
Banks are required to maintain reserve balances that are equal to a specific percentage of their deposits. These reserve balances are held in non-interest-bearing accounts in Federal Reserve banks. To maintain the required balance in these accounts, banks borrow and lend from each other during the overnight phase of their operations. The Federal Open Market Committee regulates the rates at which these transactions occur by purchasing or selling U.S. Treasury Bonds from banks:
- When the rate at which these funds are made available by banks exceeds the Federal Funds Rate target, the Federal Reserve will buy Treasury Bonds from banks. This makes more funds available, which lowers the rates at which banks lend money to each other.
- The Federal Reserve will sell Treasury Bonds to banks when the rate banks charge each other falls below the Federal Funds Rate target. This effectively reduces the amount of available cash to raise interest rates to the target level.
How Does the Federal Funds Rate Affect Commercial Real Estate Rates?
The rate at which banks can borrow money from each other serves as a benchmark for many other lending arrangements in the commercial and consumer marketplace. To ensure ongoing stability and profitability, banks charge other lenders slightly more in interest than they pay for funds from other banks. These lenders then pass on the higher interest rates to their borrowers along with a small percentage to guarantee their own profits.
When the Federal Funds Rate falls, the interest rate on all levels of the financial marketplace generally falls along with it. In a similar fashion, increases in the Federal Funds Rate translate into higher interest rates for commercial real estate acquisitions.
The Federal Funds Rate and Private Lending
Small balance private lenders like ReProp Financial offer loans for commercial property investments. The commercial real estate rates established by ReProp and others are based in part on the Federal Funds Rate and will typically fluctuate depending on the actions of the Federal Reserve. ReProp Financial is well positioned to finance commercial projects with which banks are uncomfortable or slow to approve.
If you are looking for the right commercial mortgage lending arrangements, ReProp Financial offers flexible and innovative solutions for your investment or business-related requirements. We serve most of the Western United States with direct funding options that will allow you to access the cash you need.
Give us a call today at 1-800-444-2948 to submit a loan or to touch base with our team!