Federal Funds Rate [FFR]

The federal funds rate is the interest rate at which depository institutions lend reserve balances to other banks overnight on an uncollateralized basis. Set by the Federal Open Market Committee (FOMC) eight times yearly, it’s the primary tool of U.S. monetary policy. The actual rate fluctuates around the target as banks negotiate with each other. For example, if the target is 5.25-5.50%, actual rates trade within this range. Changes ripple through the economy: higher fed funds rates increase prime rates, mortgage rates, and credit card rates, cooling economic activity. Lower rates stimulate borrowing and growth. During the 2008 crisis, the Fed cut rates to 0-0.25%, keeping them there until 2015. The fed funds rate influences global markets as many currencies and debt instruments are benchmarked to U.S. rates. Banks must maintain reserve requirements, borrowing in the fed funds market if short.