Federal Fund Rate-Things made easy!

The Fed is bank of the banks, it regulates the banks. The Fed has 12 regional Federal Banks which ensure the conformity on part of the member banks, to the regulations laid down by the Fed. One of these regulations is that each member bank must have a fixed percent of it's total reserves as a reserve with the Fed. This generally varies from 3 to 10 % of the the total reserves of the member bank. The most important thing about this reserve fund is that, they are zero interest reserves. So, the member bank doesnot get any return on this amount. As this amount earns no return, the bank has to take a very careful decision about the percentage it wants to hold as federal reserve.This reserve amount is meant to come to the bank's rescue in unexpected circumstances of very low liquidity. Low Liquidity meaning a situation where in, the bank has not enough cash reserves.Sometimes, this liquidity crunch could get much worse where the bank cannot entertain cash withdrawl from their customers.In such situations, the member bank can take loan from another member bank which has a larger federal reserve, but at an interest rate. This interest rate is called the Federal Funds Rate. The lower the rate, the easier it becomes to borrow this money from another member bank and in turn lend it to the customer at a higher rate. On the other side, if the fed rate is high, it becomes costlier for member banks to do the same.

In a Recesion:

In a recession, the Fed reduces the interest rate(as it did recently) to encourage more liquidity resulting more cash being available with the banks. As a consequence, the banks can lend more money at attractive rates to it's customers. This money in turn is spent in buying property or products, which in turn increases the industrial production(or sector specific growth), leading to increase in GDP. This is one of the very widely used techniques to handle a recession.
Read a detailed article on recession.
Other articles on Recession

In an inflationary economy:

In an inflationary economy, more money is chasing lesser value of products. As demand increases, the prices increase, which is otherwise called inflation.
So,in an inflationary economy, the Fed increases the Federal Funds Rate. This ensures that banks are left with lesser money that they can lend to the customers.This decreases the spending capability of the customers, effectively reducing the demand. Reduced demand leads to fall in prices,thereby lowering inflation levels.
Know more about Inflation