what is the federal funds rate 
the term federal funds rate refers to the target interest rate range set by the federal open market committee fomc this target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight the fomc is the policymaking body of the federal reserve system it meets eight times a year to set the target federal funds rate which is part of its monetary policy this is used to help promote economic growth understanding the federal funds ratethe federal funds rate refers to the interest rate that banks charge other institutions for lending excess cash to them from their reserve balances on an overnight basis by law banks must maintain a reserve equal to a certain percentage of their deposits in an account at a federal reserve bank the amount of money a bank must keep in its fed account is known as a reserve requirement and is based on a percentage of the bank s total deposits financial institutions are required to maintain interest bearing accounts at federal reserve banks to ensure they have enough money to cover depositors withdrawals and other obligations any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall in march 2020 the federal reserve announced the reserve requirement would be 0 effectively eliminating the requirements the central bank said this move would free up liquidity in the banking system and that it had no plans to increase the requirement in the immediate future the end of the day balances in the bank s account averaged over two week reserve maintenance periods are used to determine whether it meets its reserve requirements if a bank expects to have end of the day balances greater than what s required it can lend the excess to an institution that anticipates a shortfall in its balances the interest rate the lending bank can charge is the federal funds rate or fed funds rate the fomc makes its decisions about rate adjustments based on key economic indicators that may show signs of inflation recession or other issues that can affect sustainable economic growth the indicators can include measures like the core inflation rate and the durable goods orders report the target for the federal funds rate has varied widely over the years in response to the prevailing economic conditions it was set as high as 20 in the early 1980s in response to inflation with the coming of the great recession the rate was slashed to a record low target of 0 to 0 25 in an attempt to encourage growth in march 2020 the target rate was between 0 and 0 25 in 2022 to combat inflation the fed started raising its rate slowly which is a process that continued into 2023 the fomc last increased the target fed funds rate to a range of 5 25 and 5 5 in july 2023 it maintained this range during subsequent meetings and confirmed the range in its last meeting in june 2024 in order to keep in line with its target inflation rate and goal of reaching maximum employment although the economy is expanding and unemployment remains low the fomc remains cautious about the level of inflation which remains elevated special considerationsthe fomc cannot force banks to charge the exact federal funds rate rather the fomc sets a target rate as a guidepost the actual interest rate a lending bank will charge is determined through negotiations between the two banks the weighted average of interest rates across all transactions of this type is known as the effective federal funds rate while the fomc can t mandate a particular federal funds rate the federal reserve system can adjust the money supply so that interest rates will move toward the target rate by increasing the amount of money in the system it can cause interest rates to fall conversely by decreasing the money supply it can make interest rates rise besides the federal funds rate the federal reserve also sets a discount rate which is the interest rate the fed charges banks that borrow from it directly this rate tends to be higher than the target fed funds rate partly to encourage banks to borrow from other banks at the lower federal funds rate impact of the federal funds ratethe federal funds rate is one of the most important interest rates in the u s economy that s because it impacts monetary and financial conditions which in turn have a bearing on critical aspects of the broader economy including employment growth and inflation the rate also influences short term interest rates albeit indirectly for everything from home and auto loans to credit cards as lenders often set their rates based on the prime lending rate the prime rate is the rate banks charge their most creditworthy borrowers a rate that is also influenced by the federal funds rate investors keep a close watch on the federal funds rate the stock market typically reacts very strongly to changes in the target rate for example a small decline in the rate can prompt the market to leap higher as the borrowing costs for companies get lower many stock analysts pay particular attention to statements by members of the fomc to try to get a sense of where the target rate may be headed 