It is a market where depository institutions borrow funds overnight from certain financial institutions, including other depository institutions and government-  -3sponsored enterprises. These loans are uncollateralized, and the interest rate or cost of the loans is the federal funds rate, which is determined by the supply and demand for reserve balances that financial institutions hold in their “checking accounts” at the Fed.
3 The Fed can change the total amount of reserves available to the banking system through open market operations or its lending programs. Since the Fed controls the supply of reserves and the amount that it supplies is independent of the interest rate, the supply of reserves is illustrated as a vertical line in the stylized supply and demand curves shown in figure 2.