What Is the Fed Funds Rate? Definition and Formula

The fed funds rate is the interest rate at which banks lend their reserve balances to other banks overnight. It is not set directly by the Federal Reserve; instead, the Fed sets a target range and uses open market operations to keep the effective rate inside that range. The current target range is published by the Federal Reserve and is typically reviewed at each FOMC meeting.

What the fed funds rate measures

Banks hold reserves at the Federal Reserve to meet reserve requirements and to clear payments. When one bank has more reserves than it needs and another has less, they can lend to each other overnight. The interest rate on that loan is the fed funds rate. The effective fed funds rate is the volume-weighted average of these overnight transactions, published daily by the Federal Reserve Bank of New York.

For a full reference page that includes a live chart and the current target range, see Fed Funds Rate.

How the Fed controls the fed funds rate

The Federal Reserve does not mandate a single rate. It sets a target range, usually 25 basis points wide (for example, 4.25% to 4.50%). To keep the effective rate within that range, the Fed uses two main tools:

1. Interest on reserve balances (IORB): The Fed pays interest on reserves that banks hold at the Fed. This acts as a floor because banks will not lend reserves overnight at a rate much below what they can earn risk-free at the Fed.
2. Open market operations: The Fed buys or sells securities to adjust the supply of reserves. When it buys securities, it adds reserves, which tends to push the effective rate down; when it sells, it drains reserves and pushes the rate up.

The fed funds rate is thus a administered rate, not a market-determined one. The formula for the effective rate is:

Effective fed funds rate = (sum of overnight loan amounts × their respective rates) / total overnight loan amount

Only transactions between banks that are members of the federal funds market are included.

Release schedule and lag

The effective fed funds rate is published by the Federal Reserve Bank of New York each business day, usually around 9:00 a.m. Eastern Time, reflecting the previous day's trading. The target range is announced by the FOMC after each of its eight scheduled meetings per year. There is no lag for the target range; it is known immediately after the announcement. The effective rate is a daily series with a one-day lag.

Common misreads

Several misunderstandings are common:

• The fed funds rate is not the rate you pay on your mortgage or credit card. Those rates are influenced by the fed funds rate but also reflect credit risk, term premiums, and other factors.
• The Fed does not set the effective rate directly. It sets a target range and uses tools to keep the effective rate near the middle of that range. The effective rate can deviate slightly from the target midpoint.
• The fed funds rate is not the same as the discount rate. The discount rate is the rate the Fed charges banks for direct loans from the discount window, typically higher than the fed funds rate.
• A change in the target range does not guarantee a proportional change in longer-term rates. Long-term rates reflect expectations of future short-term rates, inflation, and term premiums.

The following table summarizes key limits and thresholds to keep in mind.

When this does not apply

The fed funds rate is a US-specific concept. It does not apply to other countries' monetary systems, which have their own policy rates (such as the ECB's deposit facility rate or the Bank of England's Bank Rate). Additionally, the fed funds market is not the only source of short-term funding; repo and other money markets also play a role, and their rates can diverge from the fed funds rate. For a broader view of how the fed funds rate interacts with other short-term rates, see 10Y Treasury Yield and 2Y Treasury Yield. For inflation context that affects the real fed funds rate, see CPI Year over Year.

How to read the fed funds rate correctly

When you see a headline about the fed funds rate, check whether it refers to the target range or the effective rate. The target range is a policy decision; the effective rate is a market outcome. Look at the date of the release: the target range is announced at FOMC meetings, while the effective rate is daily. Also consider the real fed funds rate (fed funds minus inflation) to gauge whether policy is accommodative or restrictive. The Fed publishes the target range on its website, and the effective rate is available from the New York Fed.

Finally, remember that the fed funds rate is a short-term rate. It influences other rates but does not control them. For example, the yield on 10-year Treasury notes is determined by market expectations of future short-term rates, inflation, and term premiums. Similarly, the interest rate on bank loans and mortgages includes a spread over the fed funds rate that reflects credit risk and other factors.

In summary, the fed funds rate is the overnight lending rate between banks, guided by the Fed's target range and implemented through reserve management. It is a key policy tool but not a direct lever for all interest rates in the economy.

FAQ

what is the fed funds rate right now

The current target range is set by the FOMC and announced after each meeting. The effective fed funds rate is published daily by the New York Fed. For the latest values, see the Fed Funds Rate page on this site.

how often does the fed funds rate change

The target range is reviewed at eight scheduled FOMC meetings per year, though the Fed can change it between meetings in emergencies. The effective rate changes daily based on market transactions.

is the fed funds rate the same as the interest rate on my savings account

No. The fed funds rate is a short-term rate for interbank lending. Savings account rates are set by banks and typically are lower, reflecting their costs and other factors.

what is the difference between the fed funds rate and the discount rate

The fed funds rate is for overnight loans between banks. The discount rate is what the Fed charges banks for direct loans from the discount window, and it is usually higher.