jmherbenerThe federal funds rate is the interest rate for inter-bank, overnight lending. Banks lend to other banks overnight mainly to provide reserves to the borrowing banks. So, the Fed manipulates the Federal Funds rate by purchasing assets from banks and thereby, increasing bank reserves. With a greater total stock of reserves, the Federal funds rate will be lower, given the total demand for reserves. The Fed adjusts its buying of assets to generate the amount of reserves to hit its target rate for the Federal Funds interest rate, currently 0-0.25 percent.
When banks have more reserves, they can create more credit by issuing fiduciary media. The additional supply of credit will lower interest rates. (Currently, banks are holding excess reserves instead of creating more credit.)