Question

How does the FED influence the Federal Funds Rate?

Answer 1

Generally federal funds is the rate at which the commercial banks that lend overnight loans to each other. Fed can use this rate as a target to gain it's long term goal of inflation and the employment. Fed can also increase this rate when inflation rate is too high or there is an inflationary gap.

When this rate is increased banks are less willing to lend to each other which advices that lending is decreased. These results in fewer loans that are being made and so the market liquidity is decreased. As a result, money supply is reduced and rate of inflation is brought back to a level that hovers around it's target.