Federal Funds Rate
Definition
The interest rate on certain overnight reserve-balance loans between US institutions; the Federal Reserve targets a range for this rate.
The Federal Reserve sets a target range, while eligible institutions negotiate the actual rates on their overnight loans. This benchmark influences what banks pay for short-term funding and can affect rates on savings accounts and variable-rate loans.
Example
The Fed targets a range of 4.00% to 4.25%. An eligible bank borrows overnight from another institution at 4.10%. That loan’s rate falls inside the target range.
United States
How does the federal funds rate affect U.S. borrowing costs?
The Fed sets a target range for overnight federal funds trading. A rate cut often lowers short-term borrowing benchmarks. A prime-linked credit line can respond quickly, while new fixed mortgage rates can move differently as longer-term yields change.
Federal Reserve monetary policy guide