Federal Funds Rate
The federal funds rate is the interest rate at which US depository institutions lend reserve balances to each other overnight. The Federal Open Market Committee sets a target range for it, and that range anchors short-term dollar interest rates worldwide.
Also called: fed funds rate · federal funds target range · effective federal funds rate · EFFR
Banks hold reserve balances at the Federal Reserve, and those with surplus lend to others overnight in the federal funds market. Each business day the New York Fed publishes the effective federal funds rate (EFFR) for the previous day, a volume-weighted median of overnight trades reported on form FR 2420. Since December 2008, when it cut rates to zero to 0.25 percent, the FOMC has set a target range 25 basis points wide rather than a single target.
With reserves now ample, the Fed does not steer the rate by adjusting the quantity of reserves day to day. It relies on administered rates instead: interest on reserve balances (IORB), below which banks have little reason to lend, and an overnight reverse repo facility at or near the bottom of the range, open to money market funds and other non-banks. Each FOMC decision comes with an implementation note that sets these rates.
The rate reaches far beyond banks. It anchors SOFR and other overnight rates, Treasury bill yields, the short end of the yield curve and the returns paid by money market funds. Because so much global borrowing and FX pricing is in dollars, a change in the target range flows into forward points, eurodollar funding costs and the income stablecoin issuers earn on their reserves.
In practice
Fed funds is unsecured lending between institutions. Dollar loans and derivatives now reference SOFR, a secured rate, so check which rate a contract actually uses, and always date any quoted level.
Example
Suppose the FOMC sets the target range at 4.00 to 4.25 percent. It would typically set interest on reserve balances inside the range, near the top, and the overnight reverse repo rate at the bottom, so overnight trades settle within the range. A 25 basis point cut moves all three down together, and Treasury bill yields and money market fund returns follow within days.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Federal Funds Rate, with more detail and background.
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Commonly confused with
| Term | How it differs |
|---|---|
| SOFR | SOFR is a secured overnight rate based on repo backed by Treasury securities. The federal funds rate is unsecured overnight lending of reserves. They move together but are different markets. |
See also
- SOFRSOFR, the Secured Overnight Financing Rate, measures the cost of borrowing US dollars overnight against Treasury securities as collateral. Published daily by the New York Fed, it replaced US dollar LIBOR as the main reference rate for dollar loans and derivatives.
- Yield CurveThe yield curve plots the interest rates on bonds of the same credit quality across different maturities, usually government bonds from one month to thirty years. Its shape shows what markets expect for interest rates, inflation and growth.
- Treasury BillA Treasury bill is a short-term government debt security, usually maturing within a year, that pays no coupon. It is sold below its face value and repaid at face value, and the difference is the investor's return.
- Central BankA central bank is the public institution that issues a country's currency, sets monetary policy, holds its foreign exchange reserves and acts as banker to commercial banks and the government. Most also run the core payment system and lend in emergencies.
- Money Market FundA money market fund (MMF) is an investment fund that holds short-term, high-quality debt such as Treasury bills, repo and commercial paper, and aims to keep a stable value while offering daily access. Investors use it like a deposit, but it is not one.