Federal funds rate

The federal funds rate is the interest rate that banks in the United States charge one another for overnight loans of reserves. Banks hold reserves to meet daily obligations, and those with a surplus lend to those that need more. The rate they agree on is the federal funds rate.

The Federal Reserve does not fix this rate directly. Instead, its Federal Open Market Committee sets a target range and uses policy tools to keep the market rate within it. The committee meets several times a year and can raise, lower, or hold the range based on economic conditions such as inflation and employment.

Because it sets the cost of short-term money for banks, this rate influences borrowing and saving across the wider economy. When it moves, rates on loans, credit cards, and deposit accounts tend to follow, though the size and timing of those changes vary and are not guaranteed.