Federal Funds Rate

About the Federal Funds Rate (United States)

The Federal Funds Rate (FF rate) is the interest rate on overnight reserve fund transactions conducted between U.S. banks, with the formal name "Federal Funds Rate." It is the most fundamental policy rate managed by the Federal Reserve (the Federal Reserve Board), the U.S. central bank, and is the core indicator of U.S. monetary policy.

Regarding what this indicator measures, the Federal Funds Rate is the interest rate at which banks borrow reserve shortfalls from other banks. Each bank must meet legal reserve requirements, and adjusts these through overnight market transactions, with the average interest rate on such transactions becoming the Federal Funds Rate.

The Federal Funds Rate is important for several reasons. First, by setting a target level for this rate, the Federal Reserve controls the financial environment across the entire U.S. economy. Movements in the Federal Funds Rate ripple through all interest rates provided by banks to businesses and individuals, including mortgage rates and deposit rates. Second, it most directly expresses the Federal Reserve's intent aimed at economic stability, whether suppressing price increases (inflation) or promoting economic growth.

As a general trend, when the economy is performing well and prices are rising, the Federal Reserve raises the Federal Funds Rate to contain overheating, and when the economy slows and unemployment increases, it lowers rates to stimulate growth. Particularly, zero interest rate policy persisted for many years after the 2008 financial crisis, and rapid rate increases were implemented from 2022 onward in response to inflation. It is important for investors and economic participants to pay close attention to the Federal Reserve's interest rate decisions at policy meetings and the outlook for future policy direction.