Definition
The federal funds rate is the interest rate banks charge each other for overnight loans of the reserves they keep at the Federal Reserve. It is the rate the Fed’s policy committee, the FOMC, adjusts to steer the economy: it raises the rate to cool inflation and cuts it to support growth and employment. When the news says “the Fed raised rates”, this is the rate it means.
How it works
Since 2008 the FOMC has announced a target range a quarter of a percentage point wide, such as 4.25–4.50%. It holds eight scheduled meetings a year. The Fed does not set the market rate by decree; it keeps it inside the range mainly by choosing the interest it pays banks on reserve balances and the rate on its overnight reverse repo facility. The effective federal funds rate, the volume-weighted median of actual trades published daily by the Federal Reserve Bank of New York, is what the chart shows.
From there the change spreads outward: the prime rate moves the same day, credit-card and savings rates within weeks, and Treasury yields and mortgage rates move as markets anticipate what the Fed will do next.
Example
Between March 2022 and July 2023 the FOMC raised the target range eleven times, from 0–0.25% to 5.25–5.50%. A business line of credit priced at prime plus 1% went from 4.25% to 9.50%: on a $200,000 balance, yearly interest rose from about $8,500 to about $19,000. Savers, on the other hand, could earn more than 5% in money-market funds for the first time since 2007.
Federal funds rate in history
Readings at turning points, taken from the same data as the chart above.
| Date | Fed funds rate | CPI inflation | Jobless rate | What was happening |
|---|---|---|---|---|
| Jul 1974 | 12.92% | 11.5% | 5.5% | Fed tightens against the first oil-shock inflation. |
| Jun 1981 | 19.10% | 9.6% | 7.5% | Record high under Fed Chair Paul Volcker, who targeted the money supply from October 1979 to break inflation. |
| Dec 1992 | 2.92% | 2.9% | 7.4% | Rates cut sharply after the 1990–91 recession. |
| Jul 2000 | 6.54% | 3.7% | 4.0% | Peak before the dot-com bust. |
| Jul 2007 | 5.26% | 2.4% | 4.7% | Last month before the Fed began cutting in the financial crisis. |
| Jan 2009 | 0.15% | 0.0% | 7.8% | Effectively zero: the target range of 0–0.25% lasted until December 2015. |
| Apr 2020 | 0.05% | 0.3% | 14.8% | Back to zero in the pandemic; record low. |
| Aug 2023 | 5.33% | 3.7% | 3.7% | Highest level since 2001 after the 2022–23 hikes. |
| Oct 2026 | 3.88% | – | – | Latest reading. |
Monthly values; market rates are monthly averages of daily data. Explore every month on the Federal Funds Rate chart.
Common mistakes
- “The Fed sets mortgage rates.” The Fed sets an overnight rate. Thirty-year mortgage rates follow the 10-year Treasury yield, which depends on expectations for inflation and for Fed policy years ahead. Mortgage rates can rise while the Fed is cutting.
- Confusing the fed funds rate with the discount rate The discount rate is what the Fed itself charges banks that borrow directly from it; it is set above the fed funds range.
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Federal funds rate: questions and answers
Who decides the federal funds rate?
The Federal Open Market Committee: the seven Fed governors, the president of the New York Fed and four of the other eleven regional Fed presidents on a rotating basis.
How quickly does a rate change affect the economy?
Financial markets react at once, borrowing costs within weeks, but the full effect on spending, jobs and inflation is usually felt over one to two years.