Overnight Rate
Categories: Trading
If a bank needs a quick injection of cash, it will turn to another bank. Like any loan, it has to pay a little interest for the privilege. In these cases, the rate is the overnight rate. It marks the rate that large banks pay each other for very short-term loans.
The overnight rate is set by the Federal Reserve, the U.S. central bank, and the body in charge of the country's monetary policy. It's usually the lowest possible rate in the economy (since it's such a short-term loan). Thus, the Fed uses it to set overall interest rates. Raise the overnight rate, and other rates have to rise along with them. It sets the floor for lending rates; other rates react to the overnight rate.
