Basis Point

What Is Basis Point?

A basis point is one one-hundredth of a percentage point, or 0.01%. It is the standard unit financial professionals and central bankers use to describe changes in interest rates and yields, because it avoids the ambiguity that can arise when talking about "percent" changes. One hundred basis points equal one full percentage point. So a move from 4.00% to 4.25% is a 25-basis-point change, and a move of 75 basis points equals three-quarters of a percentage point. The FOMC almost always describes its adjustments to the federal funds rate target in basis points, most commonly in increments of 25.

Why It Matters

Precision matters when trillions of dollars in loans and securities reprice with every rate move, and the basis point provides that precision. Saying a rate rose "1%" is ambiguous - it could mean one percentage point or one percent of the existing rate - while "100 basis points" is unmistakable. The unit also captures the drama of unusually large moves: during the 2022 tightening cycle the Fed's single largest hike was 75 basis points, a step widely noted as aggressive by recent standards, since the committee more often moves in 25-basis-point increments. Understanding basis points is essential to reading any Fed statement or financial-market report accurately.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• How large was the Fed's single largest rate hike of the 2022 tightening cycle?
  75 basis points (0.75 percentage points)
• What is a "basis point"?
  One one-hundredth of a percentage point (0.01%)