Federal Funds Rate

The federal funds rate is the overnight interest rate on uncollateralized loans of reserve balances between U.S. banks and certain other depository institutions. While the rate itself is determined in the market, the Federal Open Market Committee (FOMC) sets a target range (since December 2008, expressed as a range rather than a single point) at its eight scheduled meetings per year. The effective federal funds rate (EFFR), published daily by the Federal Reserve Bank of New York, is a volume-weighted median of overnight transactions.

The rate is the Fed's principal lever for implementing the dual mandate established by the Federal Reserve Reform Act of 1977: maximum employment and stable prices. Changes propagate through the economy by influencing short-term borrowing costs, longer-term yields, equity valuations, the dollar exchange rate, and ultimately consumer prices and unemployment.

Since the 2008 financial crisis, the Fed has operated an ample reserves ("floor") system. Rather than fine-tuning reserve scarcity through open market operations, it steers the EFFR using administered rates:

• Interest on Reserve Balances (IORB) — paid to banks holding reserves at the Fed
• Overnight Reverse Repo (ON RRP) rate — a floor accessible to money market funds and GSEs
• The discount rate at the discount window, which sits above the target range

The federal funds rate is distinct from, but closely linked to, SOFR (Secured Overnight Financing Rate), which replaced USD LIBOR as the primary reference rate for dollar derivatives and loans following the 2021–2023 transition.

Because the dollar anchors global trade and reserves, FOMC decisions have substantial spillover effects on emerging markets, sovereign debt costs, and exchange-rate regimes — a recurring theme in IMF Article IV consultations and G20 discussions. Researchers studying capital flows, currency crises, or the "global financial cycle" (Hélène Rey, 2013) routinely treat the federal funds rate as a key exogenous variable.