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Definition

Federal Funds Rate

The interest rate at which banks lend to each other overnight; set by the Federal Reserve.

Written by Jere Salmisto·Reviewed by CalcFi Editorial·Last verified: 2026-05-13
TL;DR

Federal Funds Rate is The interest rate at which banks lend to each other overnight; set by the Federal Reserve. Used in banking.

What Is Federal Funds Rate?

The federal funds rate is the interest rate that commercial banks charge each other for overnight loans of reserve balances. The Federal Reserve doesn't set the rate directly but targets a range (typically 0.25% to 0.5% wide) through open market operations. This rate is fundamental: it influences all other interest rates in the economy, including mortgages, auto loans, credit cards, and savings accounts. When the Fed raises the federal funds rate, banks pass increases along to borrowers; when the Fed cuts the rate, borrowing becomes cheaper. The Fed adjusts rates to control inflation and manage economic growth. Monitoring the Fed's actions is important for understanding broader economic trends and anticipating changes to interest rates you pay or earn.

How Federal Funds Rate Is Calculated

The Federal Open Market Committee (FOMC) sets a TARGET RANGE for the federal funds rate — typically 25 basis points (0.25 percentage points) wide. The Federal Reserve then uses three tools to keep the EFFECTIVE federal funds rate within that range: (1) interest on reserve balances (IORB) — the rate the Fed pays banks on their reserves, which sets the upper bound, (2) the overnight reverse repo (ON RRP) rate — a floor available to money-market funds and other counterparties, (3) open market operations — buying and selling Treasury securities to add or drain reserves. The effective rate is the volume-weighted median of actual overnight transactions in the federal funds market, published daily by the Federal Reserve Bank of New York. The FOMC meets eight times per year; statements are released after each meeting, and the minutes are published three weeks later. Common mistakes: (1) confusing the federal funds rate with the discount rate or the prime rate — the prime rate is set by commercial banks (typically fed funds upper bound + 3.0 points), the discount rate is the Fed's direct lending rate to banks (typically 0.5 points above fed funds upper), (2) assuming a single rate exists — it's a target RANGE with multiple administered rates inside it (IORB, ON RRP), (3) reading FOMC dot plot projections as commitments — they are individual participant projections of where THEY think rates SHOULD be, not policy commitments, (4) treating intermeeting moves as the norm — the Fed almost always moves at scheduled FOMC meetings; emergency intermeeting cuts are rare and signal serious distress (2008, March 2020). The FRED database has both the effective rate (FEDFUNDS, monthly) and the target range (DFEDTARU/DFEDTARL, daily) for historical analysis.

Recent Updates

2024-12-18

FOMC cut federal funds rate by 25bp to 4.25-4.50% target range, the third cut in the 2024 easing cycle.

2024-11-07

FOMC cut by 25bp to 4.50-4.75% target range.

2024-09-18

FOMC initiated easing cycle with 50bp cut to 4.75-5.00% target range, the first cut since March 2020.

2023-07-26

Final hike of 2022-23 tightening cycle: 25bp to 5.25-5.50% target range — peak rate maintained for 14 months before September 2024 cut.

Related Terms

Interest Rate
parent
Inflation
see also
Monetary Policy
parent
Yield Curve
see also
Consumer Price Index (CPI)
see also

Frequently Asked Questions

How does the federal funds rate affect mortgage rates?

The federal funds rate directly anchors SHORT-term interest rates (savings yields, credit-card APRs, HELOCs, ARM index rates after the LIBOR phase-out). LONG-term mortgage rates — the 30-year fixed in particular — are more strongly tied to the 10-year Treasury yield, which reflects market expectations about FUTURE Fed policy plus inflation expectations and a term premium. So a Fed rate hike doesn't mechanically increase 30-year mortgage rates one-for-one — the relationship is indirect via the Treasury market. The Freddie Mac PMMS publishes weekly 30-year averages; FRED tracks the daily 10-year Treasury constant maturity yield (DGS10).

How often does the Fed change the federal funds rate?

The FOMC meets EIGHT TIMES per year, roughly every six weeks. At each meeting, the committee votes to leave rates unchanged, raise them, or cut them — typically in 25 basis point (0.25 percentage point) increments. Larger moves (50 or 75 basis points) are used during sharper turning points. Emergency intermeeting cuts have happened a handful of times in recent history (2008, March 2020) and signal acute distress. The FOMC calendar and statements are published on the Federal Reserve website.

Why does the Fed raise interest rates?

The Federal Reserve has a dual mandate from Congress: maximum employment and price stability (currently interpreted as 2% PCE inflation over the long run). When inflation is running above the 2% target, the Fed raises the federal funds rate to slow demand by making borrowing more expensive — fewer mortgages, fewer auto loans, less capital spending, lower stock multiples. The rate hikes work through the economy with a long and variable lag (commonly estimated at 12-18 months). When inflation cools and/or unemployment rises above the Fed's estimate of full employment, the Fed cuts rates to stimulate demand. The semiannual Monetary Policy Report explains the current stance.

What is the difference between the federal funds rate and the prime rate?

The federal funds rate is the rate banks charge each other for overnight loans of reserves — set by the FOMC as a target range. The prime rate is the rate commercial banks charge their MOST CREDITWORTHY commercial customers — typically the federal funds rate UPPER LIMIT plus 3.0 percentage points (so when fed funds upper is 5.50%, prime is typically 8.50%). The prime rate is published by major banks and aggregated by the Wall Street Journal as the "WSJ Prime Rate" — it's the benchmark for many consumer-loan rates including credit cards, HELOCs, and personal loans. FRED publishes the historical series MPRIME.

Where can I see the current federal funds rate?

The Federal Reserve Bank of St. Louis FRED database publishes: FEDFUNDS (the monthly average effective rate), DFEDTARU / DFEDTARL (the daily upper and lower bounds of the target range), and DFF (the daily effective rate). The Federal Reserve Bank of New York publishes the effective rate daily as part of the Federal Reserve's benchmark rate suite. The Federal Reserve Board publishes FOMC statements after each meeting with the new target range. All sources are free and public.

How does the federal funds rate affect my savings account?

When the Fed raises rates, banks compete for deposits by raising savings APYs — particularly online high-yield savings accounts and money-market funds, which track the federal funds rate more closely than brick-and-mortar savings. Top high-yield savings APYs typically cluster between IORB (the Fed's rate paid on bank reserves) and fed funds upper limit. CDs also reset higher on new issues, though existing CDs keep their original rate until maturity. The FDIC National Rate gives the cross-sector average. When the Fed cuts rates, savings yields drop, typically with a slight lag.

Primary Sources

This definition is cross-checked against the following primary sources. All sources are free, public, and authoritative.

  1. Federal Reserve — FOMC Statements and Implementation Notes — Federal Reserve Board (updated after each FOMC meeting (8 per year))
  2. FRED — Federal Funds Effective Rate (FEDFUNDS) — Federal Reserve Bank of St. Louis (updated monthly)
  3. FRED — Federal Funds Target Range Upper Limit (DFEDTARU) — Federal Reserve Bank of St. Louis (updated after each FOMC meeting)
  4. Federal Reserve — Monetary Policy Report (semiannual) — Federal Reserve Board (updated semiannual)
Educational reference, not personal advice. CalcFi glossary entries are educational explanations of personal-finance concepts, cross-checked against U.S. federal primary sources. They are not personalized tax, legal, investment, or insurance advice. Tax rules, contribution limits, and rates change — verify current values against the linked primary sources before acting. For material financial decisions, consult a licensed professional.
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