Federal Funds Rate

The interest rate at which US banks lend excess reserves to each other overnight — the primary policy rate the Federal Reserve adjusts to influence the broader economy.

The federal funds rate is the benchmark interest rate in the US financial system. When the Fed "raises" or "cuts" rates it is adjusting its target for this specific overnight interbank lending rate. The FOMC sets a target range (e.g., 5.25%–5.50%) and uses open market operations to keep the actual market rate within that band.

Changes cascade through the entire economy. Banks use the fed funds rate as a foundation for prime rate, which anchors auto loans, credit cards, and small business loans. Mortgage rates respond more to long-term Treasury yields, which are influenced (but not directly controlled) by fed funds. Higher rates make borrowing more expensive throughout the economy, slowing spending, investment, and hiring — the intended mechanism for fighting inflation.

Markets obsessively watch fed funds futures and options to gauge the probability the FOMC will move at upcoming meetings. The "dot plot" released quarterly shows each FOMC member's projection for the future rate path and is among the most closely analyzed documents in global finance.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.