Federal Funds Rate
Interest rate banks charge each other for overnight loans. Set by Federal Reserve. Controls all other interest rates—mortgages, credit cards, savings.
What You Need to Know
Federal funds rate is the interest rate banks charge each other for overnight loans to meet reserve requirements. The Federal Reserve sets a target range, which influences all other interest rates in the economy.
How it works:
- Banks must keep certain reserves at the Fed
- Banks short on reserves borrow from banks with excess
- Fed sets target rate (currently 5.25-5.50% as of 2024)
- Fed uses this rate to control economy (raise to cool, lower to stimulate)
Ripple effects of changes:
- Fed raises rates → mortgages, auto loans, credit cards increase → spending slows → inflation cools
- Fed lowers rates → borrowing becomes cheaper → spending increases → economy grows
Historical range:
- 2008-2015: 0-0.25% (zero-interest rate policy after financial crisis)
- 2019: 1.50-1.75% (normal pre-COVID)
- 2022-2024: 5.25-5.50% (fighting 9% inflation)
- 1980s: 20% peak (fighting stagflation)
When Fed signals rate changes, markets react immediately. "Dot plot" quarterly projections move markets billions.
Sources & References
This information is sourced from authoritative government and academic institutions:
- federalreserve.gov
https://www.federalreserve.gov/monetarypolicy/openmarket.htm
Related Calculators & Tools
Put your knowledge into action with these interactive tools:
Related Terms in Economics
Inverted Yield Curve
Short-term bonds pay higher rates than long-term bonds. Recession predictor—has preceded every recession since 1950, usually by 12-24 months.
Market Correction
10-20% market decline from recent peak. Healthy and common—happens every 1-2 years. Not as severe as 20%+ bear market.
Prime Rate
Interest rate banks charge most creditworthy customers. Usually Fed funds rate + 3%. Credit cards and HELOCs tied to prime rate.
Recession
Economic downturn with declining GDP, rising unemployment, and reduced spending. Technically 2 consecutive quarters of negative GDP growth.
Stagflation
Stagnant economy with high inflation—worst of both worlds. Rising prices + high unemployment + no growth. Rare but devastating.
Yield Curve
Graph showing bond yields across different maturities. Normal = upward slope (long-term pays more). Inverted = recession warning.