This paper compares two financial instruments: Federal Funds versus Money Market Funds.
Banks can borrow short-term federal funds to cover their reserve requirements. To meet their reserve requirements, banks can lend or borrow federal funds from each other overnight. Federal funds rates target determine the interest rate for federal funds.
Money Market Funds on the other side are mutual funds that invest in short-term bonds such as Treasury bills and commercial paper. The money market fund’s goal is to give a steady return and minimize risk.
Money Market Funds and Federal Funds can both be considered as low-risk investments. Federal Funds, which are guaranteed by the Federal Reserve, are the most secure form of lending. Money Market Funds invest in short-term bonds securities and they are considered to be low risk because of the short maturities.