Federal Funds Rate

The federal funds rate is the price US depository institutions pay when they borrow reserve balances held at the Federal Reserve from one another, typically overnight and on an unsecured basis. The Federal Open Market Committee (FOMC) sets a target range for this rate, and moving that range is the main instrument of US monetary policy. Because the US dollar is the world's dominant reserve currency, the federal funds rate anchors short-term dollar interest rates around the world and influences exchange rates, capital flows and borrowing costs far beyond the United States.

The rate actually observed in the market is the effective federal funds rate (EFFR), calculated and published each business day by the Federal Reserve Bank of New York as a volume-weighted median of overnight federal funds transactions.

Banks hold balances in accounts at the Federal Reserve, known as reserves. Historically, banks had to meet a reserve requirement, and those short of reserves at the end of a day borrowed from those with a surplus in the federal funds market. Federal funds loans are unsecured, unlike transactions in the repurchase agreement market. Today, much of the lending comes from government-sponsored enterprises such as the Federal Home Loan Banks, which hold reserve accounts but are not eligible to earn interest on them, lending to banks that can.

Before the 2008 financial crisis, reserves were scarce and the Fed steered the rate toward a single target by adjusting the supply of reserves through open market operations. After the crisis, large-scale asset purchases under quantitative easing created abundant reserves, and the Fed moved to what it calls an ample-reserves framework. In December 2008 the FOMC began announcing a target range, initially 0 to 0.25 percent, rather than a single rate.

The Fed now keeps the effective rate inside the range mainly through administered rates:

• Interest on reserve balances (IORB): the rate the Fed pays banks on their reserves. Banks have little reason to lend reserves below it.
• Overnight reverse repurchase facility (ON RRP): lets money market funds and other eligible counterparties invest cash with the Fed, setting a floor under short rates.
• Discount window primary credit rate: the rate at which banks can borrow from the Fed, acting as a ceiling.

The reserve requirement itself was reduced to zero in March 2020. The FOMC holds eight scheduled meetings a year and announces decisions with a statement and, at some meetings, economic projections that include each participant's view of the appropriate path of the rate. For the committee's profile, see the Federal Open Market Committee regulator profile, and for the central bank as a whole, the Federal Reserve System regulator profile.

The rate has varied widely. Under Chairman Paul Volcker it reached around 20 percent in 1980 and 1981 to break high inflation. It was held near zero from December 2008 to December 2015 and again from March 2020 to March 2022. A rapid tightening cycle in 2022 and 2023 took the target range to 5.25 to 5.50 percent by July 2023, its highest level in over two decades, before the Fed began cutting in September 2024. Changes are usually made in steps of 25 basis points.

The federal funds rate feeds through to other borrowing costs. US banks' prime rate has conventionally been set at the federal funds target plus three percentage points. The Secured Overnight Financing Rate (SOFR), which replaced LIBOR as the main dollar benchmark, tracks it closely. Expectations of future fed funds moves shape the short end of the yield curve, and an inverted yield curve often reflects market expectations of future cuts.

Changes in the federal funds rate move the value of the dollar and the return on dollar assets, affecting carry trades, offshore eurodollar funding and emerging market borrowers with dollar debt. Rising US rates have historically been associated with capital outflows from emerging markets and pressure on currencies with pegs to the dollar. For payment providers, the rate determines the yield earned on dollar customer balances and float, including the reserves backing dollar stablecoins, and so has a direct effect on business models that depend on interest income.

• Board of Governors of the Federal Reserve System
• Federal Reserve Bank of New York