What is the federal funds rate?
Short answer
The federal funds rate is the interest rate banks charge each other for overnight loans of reserve balances. The Federal Reserve sets a target range for it, which is the main lever of US monetary policy.
Most relevant for: United States
The overnight interbank rate
US banks hold reserve balances at the Federal Reserve. A bank with more than it needs can lend the surplus overnight to one with less. The rate on those unsecured overnight loans is the federal funds rate.
The Federal Open Market Committee (FOMC) does not fix the rate directly. It sets a target range, and the Federal Reserve uses administered rates, including the interest it pays on reserve balances and its overnight reverse repurchase facility, to keep the market rate inside the range. The New York Fed publishes the daily effective federal funds rate.
Who decides and why
The FOMC holds eight scheduled meetings a year. Congress has given the Federal Reserve a mandate of maximum employment and stable prices, and the FOMC has stated that it judges 2% inflation over the longer run to be consistent with that mandate.
Changes to the target range tend to pass through to other short-term rates, such as those on credit cards, auto loans and savings accounts, and they affect Treasury yields and the dollar. The links are not one-for-one.
Related terms
The discount rate is what the Federal Reserve charges banks for direct loans. The prime rate is a benchmark that commercial banks set for their best borrowers and is usually tied to the federal funds target. The Secured Overnight Financing Rate (SOFR) is a different overnight benchmark based on secured loans.