Fed funds rate is the interest rate that banks charge each other to borrow or lend excess reserves overnight. Commercial banks are required to keep some reserves with the central bank, and the banks that have surplus reserves can lend them to the ones with deficits.
Basic logic says that the central bank changes interest rates, which in turn causes the commercial banks to change their rates accordingly, ultimately affecting the general interest rate in the economy.
But by definition of fed funds rate, it seems that rate increase/ decrease does affect all the commercial banks in the same manner. If we take rate increase, for example, it will impact adversely the banks with a deficit in reserves, and favorably impact the banks with a surplus. So, how does the general interest rate in the economy affected?
Please listen audio for your query.