What is the duration of a Fed funds loan?

The duration of a Fed funds loan is indeed one day. This aligns with the nature of these transactions, which involve the overnight borrowing and lending of excess reserves between banks. The Federal Reserve funds market allows banks to manage their liquidity needs on a very short-term basis. Typically, they will borrow reserves from one another overnight to meet reserve requirements, and this loan usually settles the next business day.

The one-day term reflects the necessity for banks to address immediate funding needs, ensuring they can operate smoothly without running afoul of reserve requirements. This short-term characteristic is fundamental to the mechanism of the federal funds market and is why the transactions are classified as overnight loans. Consequently, when banks engage in Fed funds transactions, they do so with the expectation that the loan will be repaid by the next business day.