The federal funds interest rate, also known as the fed rate, is the rate at which U.S. banks lend or borrow money overnight. Banks are legally required by law to have a minimum amount in reserve. Therefore, banks with excessive reserves lend money to banks that cannot meet these reserve requirements.
The current federal funds rate is 3.75% to 4.4%. This target rate is technically the Federal Reserve’s target range. The Federal Reserve has been trying to fight rising inflation since the rate was at 0% for over a year, after it had been stagnant at 0% for nearly a whole year.
The Federal Open Market Committee determines rates. Next meetings of the committee are on December 13th and 14.
Why are federal funds rates important?
The federal funds rate increases not only affects banks sending and receiving money, but also other financial institutions. The interest rates on everyday consumer products like mortgages and credit cards also rise.
Here’s how it happens: Only the Federal Reserve can alter the federal funds rate. Because that rate is linked to other rates and variables it can have broad-reaching consequences. Banks can borrow more money if the fed rate rises. It becomes more difficult for consumers to borrow money. Everything that is tied to financing can become more expensive, such as credit cards, student loans, and mortgages.
How does the federal funds rate get set?
The Federal Open Market Committee is a 12-member committee of leading banking executives from across the country that determines much Federal Reserve’s monetary policies, including the federal funds rates. It meets eight times per year, and occasionally makes rate changes beyond its scheduled meetings.
Dec. 13 – 14, 2022.
Jan. 31 – Feb. 1, 2023.
March 21-22, 2023.
May 2, 3 and 3, 2023.
June 13 – 14, 2023.
What’s the Federal Reserve Board?
The Federal Reserve Board, the umbrella agency responsible for the Federal Reserve System’s administration, is its head. It consists of three groups: The 12 Federal Reserve Banks of the U.S., Board of Governors, and Federal Open Market Committee.
This is responsible for the Federal Reserve meeting its three mandates from Congress: maintaining maximum employment, stable prices on goods and services and moderate interest rates across the country.