Federal Funds Rate and Interest Rates
Primary source: Federal Reserve Board of Governors and the Federal Reserve Bank of New York. Current and historical data available via FRED series DFF (daily effective rate) and DFEDTARU/DFEDTARL (target range).
What Is the Federal Funds Rate?
The federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. It is the most influential short-term interest rate in the U.S. economy and serves as the primary benchmark for monetary policy.
The Federal Open Market Committee (FOMC) does not directly set the federal funds rate. Instead, it sets a target range -- typically a 25 basis point (0.25 percentage point) band -- and uses monetary policy tools to keep the effective rate within that range. Since December 2008, the FOMC has expressed its target as a range rather than a single point.
How the FOMC Controls the Rate
The FOMC uses several administered rates to keep the effective federal funds rate within its target range:
- Interest on Reserve Balances (IORB) -- Set at the top of the target range. Banks have no incentive to lend federal funds at a rate below what the Fed pays on reserves, so IORB acts as a ceiling-like anchor.
- Overnight Reverse Repo Facility (ON RRP) -- Set at the bottom of the target range. Non-bank counterparties (money market funds, GSEs) can park cash at the Fed at this rate, creating a floor.
- Open Market Operations-- The New York Fed's Open Market Trading Desk can conduct repo and reverse repo operations to fine-tune conditions.
Related Interest Rates
| Rate | Description | FRED Series |
|---|---|---|
| Federal Funds Effective Rate | Volume-weighted median of overnight federal funds transactions, published daily by the New York Fed. Typically trades within the FOMC target range. | EFFR |
| Prime Rate | The rate that commercial banks charge their most creditworthy customers. Conventionally set at the federal funds target upper bound plus 300 basis points (3%). | DPRIME |
| Discount Rate (Primary Credit) | The rate charged to depository institutions that borrow directly from the Federal Reserve discount window. Set above the federal funds target to encourage interbank lending. | DPCREDIT |
| Interest on Reserve Balances (IORB) | Rate paid by the Federal Reserve on balances held at Reserve Banks. Replaced IOER and IORR in July 2021. Primary tool for keeping the effective federal funds rate within the target range. | IORB |
| Overnight Reverse Repo Rate (ON RRP) | Rate offered by the New York Fed on overnight reverse repurchase agreements. Acts as a floor for the federal funds rate by providing a risk-free overnight investment option. | RRPONTSYD |
Historical Rate Decisions (2020--2024)
Key FOMC rate decisions from the COVID-19 emergency response through the 2022--2023 hiking cycle and the beginning of the 2024 easing cycle.
| Date | Action | Target Range | Note |
|---|---|---|---|
| March 3, 2020 | Emergency cut | 1.00% - 1.25% | 50 bp cut; first emergency cut since 2008 |
| March 15, 2020 | Emergency cut | 0.00% - 0.25% | 100 bp cut to near-zero; COVID-19 response |
| March 17, 2022 | Rate hike | 0.25% - 0.50% | First hike since December 2018 |
| May 5, 2022 | Rate hike | 0.75% - 1.00% | 50 bp hike |
| June 16, 2022 | Rate hike | 1.50% - 1.75% | 75 bp hike; largest since 1994 |
| July 27, 2022 | Rate hike | 2.25% - 2.50% | 75 bp hike |
| September 21, 2022 | Rate hike | 3.00% - 3.25% | 75 bp hike |
| November 2, 2022 | Rate hike | 3.75% - 4.00% | 75 bp hike; fourth consecutive 75 bp move |
| December 14, 2022 | Rate hike | 4.25% - 4.50% | 50 bp hike; pace deceleration |
| February 1, 2023 | Rate hike | 4.50% - 4.75% | 25 bp hike |
| March 22, 2023 | Rate hike | 4.75% - 5.00% | 25 bp hike; amid banking stress |
| May 3, 2023 | Rate hike | 5.00% - 5.25% | 25 bp hike |
| July 26, 2023 | Rate hike | 5.25% - 5.50% | 25 bp hike; cycle peak |
| September 18, 2024 | Rate cut | 4.75% - 5.00% | 50 bp cut; first cut since March 2020 |
| November 7, 2024 | Rate cut | 4.50% - 4.75% | 25 bp cut |
| December 18, 2024 | Rate cut | 4.25% - 4.50% | 25 bp cut |
Source: Federal Reserve Board of Governors, FOMC press releases. The FOMC held rates steady at 5.25%--5.50% from July 2023 through September 2024 (8 consecutive meetings).
Why the Federal Funds Rate Matters
The federal funds rate influences the entire structure of interest rates in the U.S. economy. When the FOMC raises the target range, borrowing costs rise across the economy: mortgage rates, auto loan rates, credit card rates, and business lending rates all tend to increase. When the FOMC lowers the target, the reverse occurs, making borrowing cheaper and generally stimulating economic activity.
The transmission mechanism works through the banking system. Banks price loans relative to their cost of funds, which is anchored by the federal funds rate. The prime rate, for example, is conventionally set at the federal funds target upper bound plus 3 percentage points. Changes in the fed funds rate ripple through money markets, bond markets, and eventually the broader economy with a lag typically estimated at 6 to 18 months.