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What is the Fed funds rate?
The federal funds rate is the overnight interest rate at which US depository institutions lend reserves to each other. The Federal Open Market Committee (FOMC) sets a target range - currently a 25bp band - and the Fed steers the actual rate within that range using interest on reserve balances (IORB), the overnight reverse repo facility (ON RRP), and open-market operations. The fed funds rate is the anchor for the entire US rate curve and the primary lever the Fed uses to set monetary policy.
- Set by FOMC - 8 scheduled meetings per year.
- Target range - 25bp band, e.g., 5.25%-5.50%.
- Effective rate (EFFR) - The actual market rate, published daily.
- Tools - IORB, ON RRP, open-market operations.
How the Fed sets the rate
The FOMC announces a target range. The Fed then steers the actual rate within that range using:
- IORB (Interest on Reserve Balances) - upper bound, paid to banks holding reserves at the Fed
- ON RRP (Overnight Reverse Repo) - lower bound, paid to money market funds
- Open-market operations - repo/reverse repo to manage reserves
The actual market rate (EFFR - Effective Federal Funds Rate) is published daily.
Why it matters
- Anchors the entire Treasury curve through the front end
- Sets the floor for prime, mortgage, credit-card rates
- Drives USD, gold, and equity multiples through the discount-rate channel
- Is the Fed's primary tool for fighting inflation or supporting growth
How to track expectations
- Fed funds futures - market-implied path
- SOFR options - distribution around the path
- Dot plot - FOMC members' projections (quarterly)