Federal Funds Rate

What Is the Fed Funds Rate?

The federal funds rate is the overnight rate at which US depository institutions lend their excess reserves to each other. Because the Fed sets a target range for this rate and uses open market operations to keep actual trading near that target, it is effectively the benchmark for the entire US interest rate structure.

How the Fed Moves It

The Federal Open Market Committee (FOMC) meets eight times per year and votes on the target range. The Fed then uses two administered rates to keep the market rate within the target band:

- **IORB (Interest on Reserve Balances)**: The rate the Fed pays banks to hold reserves. Sets the floor. - **ON RRP rate**: The rate offered at the overnight reverse repo facility. Sets a soft floor for money market funds.

Why It Matters for Everything

The fed funds rate is the risk-free overnight rate that anchors all other interest rates:

- **Short-term rates** (T-bills, commercial paper) price off the funds rate directly - **Longer-term rates** incorporate expectations of where the funds rate will be in the future - **Credit spreads** widen or tighten relative to the risk-free rate - **Equity valuations** (DCF models) use it as a discount rate - **Dollar strength** moves with rate differentials versus foreign central banks

The Hiking and Cutting Cycle

Rate hikes tighten financial conditions, slowing growth and inflation. Cuts do the opposite. The Fed hiked 525 basis points between March 2022 and July 2023 — the fastest pace since the 1980s — to combat post-pandemic inflation, then began cutting in September 2024.

What to Watch

- FOMC meeting dates and rate decisions - The dot plot — individual FOMC member rate projections - CME FedWatch — market-implied probability of hikes or cuts at future meetings