What It Measures
The federal funds rate is the interest rate banks charge each other for overnight loans of reserves. The Federal Reserve sets a target range for this rate and uses open market operations to keep the effective rate within the range.
This rate serves as the primary tool of U.S. monetary policy and influences all other interest rates in the economy.
Why It Matters
Monetary Policy Tool: The Fed raises rates to fight inflation and lowers rates to stimulate growth.Benchmark Rate: Affects rates on mortgages, car loans, credit cards, savings accounts, and business loans.Economic Signal: Rate changes signal the Fed's view on economic conditions.Market Driver: FOMC decisions are among the most market-moving events.
How to Interpret
Target Range: The Fed sets a 25-basis-point range (e.g., 5.25-5.50%).Dot Plot: FOMC members project future rate paths in quarterly Summary of Economic Projections.Forward Guidance: Fed statements and press conferences provide context for rate decisions.Market Pricing: Fed funds futures show market expectations for future rates.
Key Levels to Watch
| Level | Interpretation |
|---|---|
| 0-0.25% | Zero lower bound, maximum accommodation |
| 0.25-2.5% | Accommodative policy |
| 2.5-4% | Neutral to slightly restrictive |
| Above 4% | Restrictive policy |