What is Fed Funds Rate?
The federal funds rate is the overnight interest rate at which US commercial banks lend reserves to each other. The Federal Open Market Committee (FOMC) sets a target range for this rate eight times per year — its decisions are the single most-watched event in global financial markets.
Definition
The Fed funds rate is technically a market rate (the actual rate banks pay each other), but the Federal Reserve sets a target range (currently in increments of 25bp) that it enforces through open market operations and interest paid on reserves. As of 2025-2026, the target range has been quoted as something like 4.25-4.50% — meaning the Fed pays this rate on excess bank reserves to keep market rates within the band. The Fed funds rate is the foundation of US dollar interest rates — Treasury yields, mortgage rates, credit-card rates, and corporate borrowing costs all derive from it via term-structure and credit-spread additions. Fed funds rate cycles drive USD strength: hiking cycles typically strengthen USD against major peers; cutting cycles weaken it.
Worked example
In March 2022, the Fed funds target was 0.00-0.25%. The Fed hiked at every meeting through 2022 and 2023, reaching 5.25-5.50% by July 2023 — the fastest tightening cycle since the 1980s. USD strengthened dramatically: EUR/USD fell from 1.14 to 0.96 (October 2022), USD/JPY rose from 115 to 150, USD/EM crosses (TRY, ARS, etc.) collapsed. In September 2024, the Fed began cutting — by mid-2026 the target range is around 4.25-4.50% as inflation fell back toward target. USD weakened modestly against major peers during the cutting cycle but remained elevated by historical standards.
Why it matters
The Fed funds rate is the single most-watched data point in global finance. FOMC meetings (eight per year, Wednesdays at 2pm ET) regularly move markets by 1-3% within minutes. For travelers and money senders, the Fed funds rate trajectory shapes USD direction over months — Fed hiking cycles make USD-funded travel cheaper abroad; Fed cutting cycles make it more expensive. For investors, the Fed funds rate is the benchmark for evaluating all other yields — a 5% Treasury when Fed funds is 5% is roughly fair-valued; a 5% Treasury when Fed funds is 2% is extremely attractive.
Live USD rates
See fed funds rate in action with live rates.
Frequently asked questions
How often does the FOMC meet?
The Federal Open Market Committee meets eight times per year — roughly every six weeks. Meetings are scheduled in advance and published on the Fed's website. The most-watched meetings are the four that include Summary of Economic Projections (SEP, the "dot plot") — typically March, June, September, December. Other meetings can also hike, cut, or hold, depending on data.
What's the difference between the Fed funds rate and SOFR?
The Fed funds rate is unsecured overnight bank-to-bank lending. SOFR (Secured Overnight Financing Rate) is secured overnight lending collateralized by Treasury bonds. SOFR replaced LIBOR as the primary US-dollar benchmark rate in 2023. The two rates track closely but SOFR is the rate used in most modern USD financial contracts (mortgages, corporate loans, derivatives).
When will the Fed cut rates?
Fed cut decisions are data-dependent — driven by inflation trends (toward or away from 2% target), unemployment data, and broader growth indicators. The September 2024 first cut was triggered by inflation falling to 2.5% and rising unemployment. Future cuts depend on whether these trends continue. Fed officials regularly signal intent through speeches and the SEP "dot plot" — markets price expected cuts via fed funds futures.
Related terms
Quantitative Easing (QE)
Quantitative easing (QE) is a monetary-policy tool where central banks buy large quantities of government bonds and other securities to inject money into the financial system, lowering long-term interest rates and stimulating lending when short-term rates are already near zero.
Inflation
Inflation is the rate at which the general price level of goods and services rises over time, reducing purchasing power. Central banks target 2% annual inflation in most developed economies; rates above 4-5% trigger aggressive monetary tightening, while deflation (negative inflation) is also feared.
Safe-Haven Currency
A safe-haven currency is one that investors buy during periods of global financial stress, often regardless of fundamental factors. The Japanese Yen (JPY), Swiss Franc (CHF), and US Dollar (USD) are the primary safe havens; gold is a non-currency safe haven.