Federal Reserve Bank of Richmond

Instruments of the Money Market Federal Reserve Bank of Richmond

The major purpose of financial markets is to transfer funds from lenders to borrowers. Financial market participants commonly distinguish between the "capital market" and the "money market," with the latter term generally referring to borrowing and lending for periods of a year or less. The United States money market is very efficient in that it enables large sums of money to be transferred quickly and at a low cost from one economic unit (business, government, bank, etc.) to another for relatively short periods of time. The need for a money market arises because receipts of economic units do not coincide with their expenditures. These units can hold money balances-that is, transactions balances in the form of currency, demand deposits, or NOW accounts-to insure that planned expenditures can be maintained independently of cash receipts. Holding these balances, however, involves a cost in the form of foregone interest.