The federal funds market is the short-term (usually overnight) lending and borrowing among banks in the United States to meet the FEDERAL RESERVE SYSTEM’s reserverequirement ratio. Though it is called the federal funds market, the Federal Reserve does not operate or control the market. Banks are required by the Federal Reserve to keep a set percentage of their deposits as cash or other specified U.S. TREASURY SECURITIES. These required reserves are available when customers want their deposits returned and act as a source of liquidity for banks. As banks receive more deposits, their RESERVE REQUIREMENTS increase. At the end of each business day, bank managers calculate their required reserves, determine whether they have excess or insufficient reserves, and lend or borrow reserves electronically in the federal funds market. LOANS made in the federal funds market are returned the next business day. Banks borrowing to meet their reserve requirement will compare rates in the market, attempting to minimize their COSTS. Federal-funds rates tend to be uniform among participating banks, but they increase or decrease depending on the DEMAND for and SUPPLY of funds available. Depending on the Federal Reserve’s MONETARY POLICY, the Federal Reserve will increase or decrease the supply of funds in the federal funds market through OPEN-MARKET OPERATIONS. By purchasing securities from banks, the Federal Reserve increases the supply of funds in the market, which tends to decrease the federal-funds rate. Sale of securities by the Federal Reserve would have the opposite effect. Increasing federal-funds rates increases the costs to banks, which in turn increases rates charged to borrowers, decreasing borrowing from banks.