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The interest rate banks charge each other to borrow reserves overnight. The Fed sets a target for it.
Why It Matters
The federal funds rate is the anchor for short-term interest rates across the economy. When the Fed changes its target, the cost of borrowing ripples outward into savings rates, credit cards, business loans, and eventually mortgage and bond markets. It is the single number most associated with "the Fed raised (or cut) rates."
Key Points
- Set as a target range (for example, 5.25%–5.50%), not a single fixed number
- Decided by the FOMC across its eight scheduled meetings a year
- Changes are usually measured in basis points (25 bps = 0.25%)
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How the Fed Sets Interest Rates
Get a complete explanation with examples, key takeaways, and a quiz to test your knowledge.
Related Terms
Common Questions
The interest rate banks charge each other to borrow reserves overnight. The Fed sets a target for it. The federal funds rate is the anchor for short-term interest rates across the economy. When the Fed changes its target, the cost of borrowing ripples outward into savings rates, credit cards, business loans, and eventually mortgage and bond markets.
The federal funds rate is the anchor for short-term interest rates across the economy. When the Fed changes its target, the cost of borrowing ripples outward into savings rates, credit cards, business loans, and eventually mortgage and bond markets. It is the single number most associated with "the Fed raised (or cut) rates."
Set as a target range (for example, 5.25%–5.50%), not a single fixed number
Decided by the FOMC across its eight scheduled meetings a year
Changes are usually measured in basis points (25 bps = 0.25%)