Federal Funds Rate

Banks in the United States hold reserves at the Federal Reserve. Those with more reserves than they need can lend them overnight to banks that need more. The interest rate on these loans is the federal funds rate.

The Federal Reserve's Federal Open Market Committee sets a target range for this rate, for example 4.25% to 4.50%, at its regular meetings. It keeps the actual rate within the range mainly by setting the interest it pays banks on their reserves and through other tools, rather than by dictating the rate directly.

For example, when the Federal Reserve raises its target range to fight inflation, borrowing costs rise across the economy. Banks typically adjust their prime rate, which is linked to many credit cards and business loans, almost immediately.

The federal funds rate influences mortgage rates, bond yields, the value of the dollar and global financial conditions, so Federal Reserve decisions are closely watched worldwide. Other central banks have their own equivalent policy rates, such as the Bank Rate in the United Kingdom and the main refinancing rate in the euro area.