The federal funds rate is the interest rate at which depository institutions, such as banks and credit unions, lend reserve balances to other depository institutions overnight on an uncollateralized basis. The Federal Open Market Committee (FOMC) sets a target range for the federal funds rate as a way of implementing U.S. monetary policies. The effective federal funds rate (EFFR) is calculated as the effective median interest rate of overnight federal funds transactions during the previous business day. The EFFR is published daily by the Federal Reserve Bank of New York.
The federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York, which deals primarily in domestic securities such as U.S. Treasury and federal agencies securities. The federal funds market consists of domestic unsecured borrowings in U.S. dollars by depository institutions from other depository institutions and certain other entities, primarily government-sponsored enterprises.
The target for the federal funds rate has varied widely over the years in response to prevailing economic conditions. For example, in October 2019, the target range for the Federal Funds Rate was 1.50–1.75%. On March 15, 2020, the target range for Federal Funds Rate was 0.00–0.25%, a full percentage point drop less than two weeks after being lowered to 1.00–1.25%. In light of the 2021–2022 global inflation surge, the Federal Reserve has raised the FFR aggressively. In the latter half of 2022, the FOMC had hiked the FFR by 0.75 percentage points on 4 different consecutive occasions, and in its final meeting of 2022, hiked the FFR a further 0.5 percentage points. As of November 7, 2023, the current target rate for the federal funds rate is 5.25-5.50%.
The federal funds rate is one of the most important interest rates in the U.S. economy because it impacts monetary and financial conditions, which in turn have a bearing on critical aspects of the broader economy including employment, growth, and inflation. The federal funds rate is dynamic, rising and falling as the FOMC responds to changes in the economy.
