Federal Funds Rate

What Is Federal Funds Rate?

The federal funds rate is the interest rate that banks charge one another for overnight loans of reserves - the balances they hold at the Federal Reserve. It is the specific rate the FOMC targets when it sets monetary policy. Rather than dictating the rate by decree, the Fed steers it into a target range using open market operations and administered rates such as interest paid on bank reserves. Changes are often described in basis points, where one basis point equals one one-hundredth of a percentage point. When the FOMC leaves the target unchanged at a meeting, that decision is called a hold or a pause.

Why It Matters

The federal funds rate is the Fed's primary lever over the economy. Raising it is generally the Fed's main tool for fighting high inflation, because higher borrowing costs cool spending and investment; cutting it is the main tool for stimulating a weak economy. The rate's history tracks major events: the Fed lowered its target to 0%-0.25% in December 2008, delivered its first hike since the crisis in 2015, cut to near zero again in March 2020, and during the 2022-2023 tightening cycle raised the target to roughly 5.25%-5.50%, including a single hike of 75 basis points. Because it anchors short-term borrowing costs, the rate influences everything from car loans to Treasury yields.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What is the specific interest rate the FOMC directly sets?
  The federal funds rate
• The federal funds rate is the interest rate banks charge each other for what kind of loans?
  Overnight loans of reserves
• Approximately how high did the federal funds rate peak during the 2022-2023 tightening cycle?
  About 5.25%–5.50%