Federal Funds Rate
Quick Answer
The interest rate at which banks lend reserves to each other overnight, set by the Federal Reserve.
How It Works
Banks are required to hold reserves. When a bank has excess reserves, it can lend them to banks that need reserves to meet requirements.
The Target Range: The Fed sets a target range (e.g., 5.25%-5.50%) rather than an exact rate. The effective fed funds rate fluctuates within this range.
FOMC Meetings: The Federal Open Market Committee meets 8 times per year to decide the target rate.
Why It Matters
Benchmark for All Rates The fed funds rate is the foundation for: - Prime rate (usually fed funds + 3%) - Mortgage rates - Credit card rates - Savings account yields - Bond yields
When the fed funds rate changes, these rates follow.
Trading Fed Decisions
Before the Meeting: Fed funds futures show market expectations. Check CME FedWatch Tool for probabilities.
The Announcement: Released at 2:00 PM ET on FOMC days. The statement, dot plot, and press conference all matter.
Key Points: - Is the decision as expected? - How did the forward guidance change? - What's the voting split?