how the overnight rate works
the amount of money a bank has fluctuates daily based on its lending activities and its customers withdrawal and deposit activity a bank may experience a shortage or surplus of cash at the end of the business day those banks that experience a surplus often lend money overnight to banks that experience a shortage of funds so as to maintain their reserve requirements the requirements ensure that the banking system remains stable and liquid the overnight rate provides an efficient method for banks to access short term financing from central bank depositories as the overnight rate is influenced by the central bank of a nation it can be used as a good predictor for the movement of short term interest rates for consumers in the broader economy the higher the overnight rate the more expensive it is to borrow money as of may 2022 the federal funds rate sits at a rate of 0 77 an increase from the previous month s rate of 0 33 1in the united states the overnight rate is referred to as the federal funds rate while in canada it is known as the policy interest rate the rate increases when liquidity decreases when loans are more difficult to come by and falls when liquidity increases when loans are more readily available as a result the overnight rate is a good indicator of the health of a country s overall economy and banking system effects of the overnight ratethe overnight rate indirectly affects mortgage rates in that as the overnight rate increases it is more expensive for banks to settle their accounts so to compensate they will raise longer term rates the federal reserve influences the overnight rate in the united states through its open market operations the overnight rate in turn affects employment economic growth and inflation this rate has been as high as 20 in the early 1980s and as low as 0 after the great recession of 2007 08 1