What it is
The federal funds rate is a key benchmark interest rate in the U.S. financial system. It represents the interest rate at which commercial banks lend their excess reserves to other banks overnight in the federal funds market. The Federal Open Market Committee (FOMC) sets a target range for this rate, which is then influenced by the Fed through open market operations, primarily by adjusting the interest paid on bank reserves.
Changes in the federal funds rate ripple throughout the economy, influencing other interest rates such as prime rates, mortgage rates, and consumer loan rates. When the Fed raises the federal funds rate, borrowing becomes more expensive, slowing economic activity to combat inflation. Conversely, lowering the rate stimulates economic growth. Investors closely watch rate changes as they impact the cost of capital for businesses and the attractiveness of different asset classes.
Why it matters
This rate directly impacts the interest you pay on loans (mortgages, credit cards) and the returns on your savings. Watch it closely.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice