Federal funds rate
fed funds rate · fed funds
The federal funds rate is the overnight rate at which US banks lend reserves to each other; the Fed sets a target range for it, making it the de facto US policy rate.
In plain terms
At the end of each day, banks with spare reserves lend them overnight to banks that are short. The rate on those loans is the federal funds rate. At FOMC meetings, the Fed sets a target range for it (for example 3.75% to 4.00%) and uses its tools to keep the actual rate inside that range. When the news says "the Fed's benchmark rate," this range is what it means.
Why it matters
It anchors short-term US interest rates, so loan rates, Treasury yields and the dollar all key off it. It is also the yardstick for comparing US rates with other countries'.
How it connects to markets
- A higher target range: 2-year Treasury yields and the dollar tend to rise; growth stocks and crypto come under pressure
- A lower target range: short-term rates and the dollar tend to fall; risk assets usually benefit
- Futures markets price the odds of each decision in advance, so the biggest moves come when the Fed surprises