• Overnight rates are the rates at which banks lend money to each other at the end of the day in the overnight market.
  • The purpose of this lending activity is to ensure compliance with the mandatory reserve requirements of the federal level.
  • When a bank cannot meet its reserve requirement, it borrows from a bank that has an excess reserve.
  • Overnight rates are predictors of short-term changes in interest rates in the economy as a whole and can have a domino effect on various economic indicators such as employment and inflation.
  • The higher the overnight rate, the more expensive it is for consumers to borrow money, since the increased cost for banks is passed on to consumers.