What is the fed funds rate?
In one line: The fed funds rate is the interest rate US banks charge each other for overnight loans of reserves, kept within a target range set by the Federal Reserve.
A simple example
Banks lend spare cash to each other overnight. The rate on those loans is the fed funds rate.
The Federal Reserve doesn't set one exact number. The FOMC, its rate-setting group, sets a target range a quarter point wide.
Say the range is 4.25% to 4.50%. That's an illustration, not today's rate.
- If the Fed raises by 0.25 point, the new range is 4.50% to 4.75%.
- If it cuts by 0.25 point, it's 4.00% to 4.25%.
The Fed uses its own tools, like the rate it pays banks on reserves, to keep the real overnight rate inside the range. The New York Fed publishes the "effective" rate each day.
When it changes
The FOMC meets 8 times a year. The decision comes out at 2:00 pm ET, and the Fed Chair holds a press conference at 2:30 pm. The Fed can also act between meetings in an emergency, but that's rare.
You can find the schedule on federalreserve.gov.
Why it matters
It's the base that other short-term rates build on: savings accounts, credit cards, Treasury bills. When it moves, ripples spread through stocks, bonds, the dollar and gold. Our FOMC meeting guide shows how to read the day.
A common mistake
Expecting the market to jump on every rate change. Most decisions are widely expected. Futures markets price them in ahead of time. Prices often react more to the statement, the Fed's projections, or the tone of the press conference than to the move itself.
Fed days can swing hard both ways. Many beginners stay flat into 2:00 pm ET and wait for things to settle. See CPI and FOMC days.
Questions
Who decides the fed funds rate?
The Federal Open Market Committee (FOMC): the Fed's Board of Governors plus five regional Fed bank presidents who vote.
How does the fed funds rate affect me?
It feeds into rates on savings, credit cards, many loans and short-term bonds, usually within days or weeks of a change.
How often does the fed funds rate change?
It can change at any of the 8 yearly meetings, but often stays the same for several meetings in a row.
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