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Volatile liabilities are those that are sensitive to changes in market interest rates, making them the type of liabilities most likely to fluctuate with shifts in the interest rate environment. This includes products such as certain money market accounts and other short-term funding options that can be readily moved or adjusted based on prevailing interest rates.

As market interest rates rise, investors often shift their preferences, seeking higher returns and causing banks to adjust their rates on these volatile liabilities to attract or retain customers. Conversely, when rates drop, banks might decrease the rates on these liabilities to maintain profitability. This responsiveness to market conditions differentiates volatile liabilities from core deposits and time deposits, which typically have more stable and less frequent rate adjustments.

Core deposits, while important for a bank's funding, are usually more stable and less sensitive to short-term interest rate changes. Time deposits have fixed terms and interest rates which generally do not fluctuate with market rates until they mature. Deposits at the Federal Reserve are also generally not subject to immediate changes in market interest rates, as they serve a different purpose in managing liquidity and reserve requirements.