The federal funds rate is the single most important interest rate in the U.S. economy, even though most people never borrow or lend at it directly. Here’s what it actually is and why it matters to you.
Published July 2026 · 5 min read · Wall Street Sights Markets Desk
Table of Contents
Quick Answer
The federal funds rate is the interest rate banks charge each other for overnight loans of reserves. The Federal Reserve sets a target range for this rate, and it serves as the base for countless other rates across the economy, from credit cards to savings accounts.
Key Takeaways
- It’s a bank-to-bank rate, not a rate you or I ever pay directly.
- The Fed sets a target range (for example, 3.50% to 3.75%), not one exact number.
- It’s the foundation that banks’ “prime rate” is built on, which in turn prices many consumer loans.
- The Federal Open Market Committee (FOMC) reviews and can adjust this target eight times a year.
Why Banks Borrow From Each Other Overnight
Banks are required to keep a minimum amount of cash in reserve. On any given day, some banks end up with more cash than they need, while others fall short. Rather than let that cash sit idle or scramble for funds, banks lend to each other overnight to balance things out. The interest rate on those loans is the federal funds rate.
How the Fed Sets It
The Federal Open Market Committee doesn’t order banks to charge an exact rate. Instead, it sets a target range and uses tools like the interest rate it pays banks on reserves held at the Fed to keep the actual rate trading within that range. When you hear that “the Fed raised rates by a quarter point,” it means the FOMC moved this target range up by 0.25 percentage points.
Why It Affects So Much of the Economy
Banks set their prime rate, the rate offered to their most creditworthy customers, a few percentage points above the federal funds rate. From there, credit cards, home equity lines of credit, and many small business loans are priced directly off the prime rate. Savings account and CD yields also tend to move in the same direction as the federal funds rate, though banks adjust them at their own pace rather than instantly.
What It Doesn’t Directly Control
Mortgage rates are one of the most common points of confusion. They’re driven more by the 10-year Treasury yield and investor expectations about future Fed policy than by the federal funds rate itself, which is why mortgage rates sometimes move before or even opposite to an actual Fed decision.
FAQ
Is the federal funds rate the same as mortgage rates?
No. Mortgage rates are influenced by the Fed’s policy stance but track the 10-year Treasury yield more closely than the federal funds rate itself.
Who sets the federal funds rate?
The Federal Open Market Committee, a 12-member group made up of the Fed’s Board of Governors, the New York Fed president, and four rotating regional Reserve Bank presidents.
How often does it change?
The FOMC reviews it at eight regularly scheduled meetings a year, though it doesn’t necessarily change the rate at every meeting.
Sources
- Federal Reserve — Federal Open Market Committee
- Federal Reserve — The Fed Explained: How the FOMC Implements Rate Decisions
This article is for general information and is not personalized financial advice.
Related Reading
- The Complete Federal Reserve Guide 2026
- How Fed Rate Decisions Affect Savings and CD Yields
- Fed Meeting July 2026: What the Interest Rate Decision Means for You
Senior Markets Correspondent
Sarah specializes in U.S. and global stock markets, corporate earnings, and macroeconomic trends. With over a decade of experience covering Wall Street and international exchanges, she breaks down complex financial news into actionable insights for everyday readers.
