Federal funds rate: what it is and how it works

The federal funds rate is the overnight interest rate set by the Federal Open Market Committee; on December 18 the Fed set the target range at 4.25% to 4.50%.

The federal funds rate is the overnight interest rate banks charge one another and it is set by the Federal Open Market Committee. The Federal Reserve uses this rate as a primary tool to manage the amount of cash and available funds in the U.S. financial system. Changes to the fed funds rate influence borrowing and saving rates across loans, credit cards, mortgages, and some fixed-income returns. On December 18 the Fed lowered its benchmark and set the target range at 4.25% to 4.50%. Key points: - The federal funds rate is the overnight interbank lending rate that helps banks meet reserve requirements. - The Federal Open Market Committee (FOMC) sets a target range; the source lists the target range as 4.25% to 4.50% as of December 19. - The effective federal funds rate was reported as 4.50% on December 18; the effective rate is the volume-weighted median of overnight rates banks pay. - The Federal Reserve cut the federal funds rate three times in 2024; Chair Jerome Powell described the December cut as "the best decision" and said the Fed should move cautiously on cuts in 2025. - The FOMC meets at least eight times a year; the source lists the next meeting as January 28–29, 2025. Summary: Changes in the federal funds rate affect many other interest rates, including the prime rate, consumer loans, savings yields, and Treasury and corporate bond benchmarks, and they can influence borrowing, spending, and employment conditions. The Fed reduced its rate in December and adjusted it three times during 2024; the committee’s next scheduled meeting in the source is January 28–29, 2025.