FACTBOX-U.S. federal funds market and target rate

NEW YORK, Aug 14 (Reuters) - Federal funds, or bank
reserves which trade in the overnight market, have shown sharp
volatility in the past week.

They have traded as high as about 6 percent and as low as
zero -- the lowest in at least seven years -- as the Federal
Reserve has made its biggest additions of extra cash to the
banking system since September 2001.

Below are some key facts about federal funds, commonly
known as fed funds, and the target rate the U.S. central bank
sets for them:

THE FEDERAL RESERVE: The Fed has a target rate for federal
funds which is the benchmark U.S. overnight lending rate and
serves as the benchmark for most short-term borrowing costs.
That target has been held at 5.25 percent since June 2006, and
is set by the Federal Open Market Committee (FOMC) at regular
policy meetings. The next FOMC meeting is on Sept. 18. The U.S.
central bank can also change its target rate between meetings
in response to swiftly changing economic or market conditions.

HITTING THE TARGET: The New York Federal Reserve acts on
behalf of the Federal Open Market Committee in using open
market operations to add or drain cash from the banking system,
usually with the aim of keeping federal funds trading close to
the target rate.

When lending conditions tighten, as during credit market
jitters last week, the fed funds can get pushed markedly above
the Fed's target rate by rising demand for and shrinking supply
of available credit.

The Fed may then lend hefty amounts of cash overnight to
banks via repurchase operations, as it did last week when
global central banks added substantial liquidity, aiming to
calm nervous credit markets. An abundance of cheap overnight
money can bring the rate federal funds trade well below the
target rate.

DOWN TO ZERO: According to data from The Federal Reserve
Bank of New York, federal funds low trade of the session on
both Friday and Monday was zero percent. On Friday, the highest
traded intraday level was 6.05 percent, while Monday's intraday
high was 5.5 percent.

Market analysts said the low trades showed that the Fed's
liquidity infusions had been enough to bring down the cost of
overnight money steeply as volume thinned in late afternoon
trade. Data for federal funds on the New York Fed Web site goes
back to January 2000 and shows that federal funds have not
traded at zero before then, although they have come close.

In the aftermath of the Sept. 11, 2001 attacks, fed funds
traded at 0.06 percent according to Federal Reserve data. In
August 2004, fed funds traded at 0.03 percent.

A zero intraday trade for federal funds may be an even
rarer event, analysts say.

"I find no evidence of federal funds trading at zero at any
time since at least 1988," said Tony Crescenzi, chief bond
market strategist, Miller, Tabak & Co. in New York.

FED EFFECTIVE RATE: The Fed effective rate, which was 4.81
percent on Monday, below the 5.25 percent target rate, is a
weighted average for federal funds for the session. This rate
shows how close the central bank came to meeting its target for
overnight lending rates that day.

SUPPLY: Issuance of Treasury bonds and notes can put upward
pressure on federal funds, bond analysts say. For example, the
settlement of last week's 10-year Treasury note and and 30-year
Treasury bond auctions this week could put upward pressure on
federal funds, said Josh Stiles, bond strategist and managing
director with IDEAglobal in New York.

HOURS: The fed funds market closes at 6:30 p.m. EDT (2230
GMT) and reopens that same evening at 9 p.m. EDT, according to
the New York Fed.
(Richard Leong and Ellen Freilich contributed to this report)