Federal Funds Rate
Quick Definition
The interest rate at which banks lend reserve balances to each other overnight, set as a target range by the Federal Reserve.
What Is Federal Funds Rate?
The federal funds rate is the benchmark interest rate at which depository institutions (banks and credit unions) lend reserve balances to each other on an overnight, uncollateralized basis. The FOMC sets a target range (e.g., 5.25%-5.50%) and uses open market operations to keep the effective federal funds rate within that range. Though it directly governs only overnight interbank lending, the federal funds rate serves as the anchor for the entire interest rate structure in the economy. Changes ripple through to the prime rate (typically fed funds + 3%), credit card rates, auto loans, adjustable-rate mortgages, corporate borrowing costs, and savings account yields. The rate also influences global capital flows and exchange rates, as higher U.S. rates attract foreign investment into dollar-denominated assets. The FOMC meets eight times per year, and its rate decisions (along with the "dot plot" projections) are among the most anticipated events in financial markets. The fed funds rate has ranged from effectively 0% (2008-2015 and 2020-2022) to over 20% (1980-1981 under Paul Volcker). Rate futures markets allow investors to bet on and hedge against future rate changes.
Federal Funds Rate Example
- 1The FOMC raised the federal funds rate from 0-0.25% to 5.25-5.50% between March 2022 and July 2023, the fastest tightening cycle in 40 years
- 2When the fed funds rate was near zero from 2020-2022, savings accounts paid virtually nothing, pushing investors into riskier assets for yield
Related Terms
Federal Reserve (The Fed)
The central banking system of the United States, responsible for monetary policy, bank regulation, and financial stability.
Monetary Policy
Actions by a central bank to manage the money supply and interest rates to achieve macroeconomic objectives like stable prices and full employment.
Base Rate
The benchmark interest rate set by a central bank that influences all other interest rates in the economy.
Interest Rate Differential
The difference in interest rates between two countries or two financial instruments, influencing capital flows and currency values.
ZIRP (Zero Interest Rate Policy)
A monetary policy strategy where a central bank sets its benchmark interest rate at or near zero to stimulate economic activity.
GDP (Gross Domestic Product)
The total monetary value of all finished goods and services produced within a country's borders in a specific time period.
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