Federal funds rate
Also called Fed funds rate
The interest rate banks charge each other for overnight loans of reserves, targeted by the Federal Reserve to steer the economy.
What it means
The federal funds rate is the rate at which banks lend reserve balances to one another overnight. The Federal Reserve’s Federal Open Market Committee (FOMC) sets a target range for this rate at its regularly scheduled meetings, held eight times a year, and uses its policy tools to keep the actual rate within that range.
Consumers do not borrow at this rate, but it ripples through the economy. Changes quickly affect the prime rate, credit card APRs, HELOCs and savings account yields. Mortgage rates are influenced too, though more indirectly, since they track longer-term market rates. The Fed generally raises the target to cool inflation and lowers it to support growth and employment.
Example
For example, if the Fed raises its target range by 0.25 percentage points, a credit card tied to the prime rate at 22% APR would typically rise to 22.25% within a billing cycle or two, and high-yield savings rates often edge up as well.
How it’s used
- Understanding why borrowing and savings rates change
- Following economic news and Fed announcements
- Anticipating changes on variable-rate debt
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.