What is the Federal Funds Rate or Fed Funds Rate? The Fed Funds Rate -- short for Federal Funds Rate -- is the short-term interest rate at which U.S. depository institutions (commercial banks, savings and loan associations, credit unions, mutual savings banks, etc.) lend to each other overnight within the Federal Reserve system (minimum loan amount is $1,000,000.)

The U.S. Federal Reserve sets a target for the Federal Funds Rate, and keeps the rate on target via open market operations, i.e., the buying and selling of U.S. Treasuries. In most cases, when economists, academics, investors and central bankers refer to the Federal Funds Rate, they are actually referring to the Fed Funds Rate Target.

The Fed Funds Target Rate is America's most important and most influential benchmark interest rate. The Fed Funds Target Rate can be described as the "main" or "key" interest rate for the United States. The interest rate-setting Federal Open Market Committee (FOMC) uses the Fed Funds Target Rate as its most potent tool for regulating the U.S. economy, lowering it when the economy needs a boost, and raising it when the rate of inflation is too high.

U.S. law requires that depository institutions keep a certain percentage of their customers' money on reserve at one of the 12 regional Federal Reserve banks situated in major U.S. cities:

Depository institutions earn no interest on reserve funds, so, as you might have guessed, banks try to stay as close to the reserve limit as possible without going under it, lending money back and forth so as to maintain a reserve level that is both legal and allows banks to maximize profits.

The Fed Funds Rate Target is set by the FOMC, the Fed's 12-member monetary policy body (7 Fed Governors plus 5 Federal Reserve Bank presidents). The FOMC convenes regularly scheduled monetary policy meetings eight time per year, and it is at these meetings that the FOMC decides whether to raise, lower or leave the Fed Funds Target Rate unchanged. During times of economic crisis, the chairman of the Federal Reserve may at any time convene an emergency FOMC monetary policy meeting and raise or lower the Fed Funds Target Rate, depending on the nature of the crisis.

As America's cardinal short-term interest rate, the Fed Funds Rate Target influences some of the most important market interest rates throughout the world, including the LIBOR rates and the U.S. Prime Rate.

Click Here for a comprehensive history of the Federal Funds Rate.

The Current Federal Funds Target Rate is: 3.00% (the last rate change--a decrease of 50 basis points [0.50 percentage point]--occurred on January 30, 2008)

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Chart of The Fed Funds Rate Target    |    SITEMAP Click Here for the Wall Street Journal Prime Rate. Click Here for The London InterBank Offered Rates (LIBOR).