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Question

What is the federal funds rate? What role does it play in monetary policy?

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Answer 1

Federal funds rate - the interest rate that banks charge each other on overnight loans of reserves.

FED may regulate money-supply by changing  federal funds rate

Answer 2

Previous poster is correct that the fed funds rate is the interest rate that banks charge each other for overnight loans.  They loan each other money because they have to meet reserve requirements, which they can satisfy by holding money in their account with the Fed.  Since those accounts don't pay interest, banks with excess reserves like to lend money to banks in need of reserves in exchange for an interest payment.

The federal funds rate is the primary instrument of US monetary policy.  The Fed adjusts the federal funds rate by increasing or decreasing the money supply.  (To increase the money supply, it buys bonds in exchange for cash.  To decrease the money supply, it sells bonds in exchange for cash.)  Since many other interest rates are based on the fed funds rate, changing the fed funds rate changes the demand for savings and investment, which affects the greater economy.