Federal funds rate: What it is and how it affects you

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The FOMC began a new interest rate cycle, raising the federal funds rate a quarter point on Sept. 16. Wall Street traders expect at least one more rate increase before the end of 2026.

The federal funds rate. The Fed. The FOMC. No doubt you've heard and read these terms before. But what do they mean? How does this impact your financial life?

The federal funds rate is the interest rate the government sets for one bank to charge another bank for ultra-short-term loans, usually just overnight. It's actually an interest rate range. Banks negotiate a specific rate with each other within that range set by the Federal Reserve.

The current federal funds rate is now 3.75% to 4.00%.

The history of fed funds rate increases and declines over the past five years looks like a small mountain with a steep ascent, a flat peak, and a gentle decline. With the latest increase, there's now an abrupt, but short tail.

After years of interest rates at zero, the Fed began raising the fed funds target in March 2022. After 11 rate hikes, some of them jumbo increases of 0.75%, the Fed settled at 5.25% in July 2023.

The fed funds rate held firm until Sept. 2024, when the Fed reversed course and initiated the first half-point cut. After two more quarter-point decreases, by December, the federal funds rate was frozen at 4.25% until Sept. 2025, when the Fed launched the first of three rate cuts for the year.

Since then, rates were unchanged until the first hike in Sept. 2026.

Want more context? Here are some additional details.

The federal government used to require banks to hold a certain percentage of their deposits in cash as a reserve. That ended in 2020.

When banks were required to have reserves, those funds were held in the U.S. Federal Reserve System , often called "the central bank" or just "the Fed." There are 12 Federal Reserve banks across the nation.

Today, banks still hold money at the Fed, but for a different reason: to manage the flow of enormous sums of cash day to day. For example, when a bank moves a great deal of money and needs some extra liquidity, it can borrow the cash from another financial institution through the Federal Reserve System.

Now, here's why all of this matters to those of us who aren't bankers.

The U.S. central bank — the Federal Reserve — has a committee that meets eight times a year to set the target range that banks will use to borrow from each other. It's called the Federal Open Market Committee.

At these meetings, the FOMC decides whether to raise, lower, or keep that interest rate the same.

Even a rate pause makes financial news headlines.

Why does the Fed adjust the federal funds rate?

The Fed makes these interest rate decisions to adjust the U.S. economy and manage consumer costs. Higher prices on groceries, gas, and most everything else is called inflation .

By raising interest rates, the Fed makes borrowing money more expensive. As a result, the economy is expected to slow, and with it, the inflation rate will ease.

If the economy needs a boost, the Fed decreases interest rates.

If the economic outlook is unclear, the Fed waits.

How does the federal funds rate affect me?

Those interest rate changes at the very top rung of the financial pyramid trickle all the way down through the banking industry. Since banks pay interest to borrow from each other, they use that baseline cost to set their interest rates for consumers.

Interest paid on savings and money market accounts

Interest paid on high-yield savings accounts

Interest paid on certificates of deposit

Interest charged on loans, such as student and auto loans

The federal funds rate does not directly impact mortgage rates, but Fed interest rate moves do influence Treasury bonds and the bond market as a whole. So, a rising or falling fed funds rate will give you an idea of how home loan rates will likely move.

So now that you're pretty much a monetary policy expert, when someone asks your group over coffee, "What's up with the fed funds rate?" you can take it.

The federal funds rate is the interest rate that depository institutions charge each other for overnight loans. The effective federal funds rate (EFFR) is the median rate charged for those loans from the prior business day. Since the fed funds rate range was raised to 3.75% to 4.00%, the EFFR is expected to be between those two numbers. The real fed funds rate is 3.88% today.

What is the difference between the fed funds rate and the discount rate?

The federal funds rate is the interest rate banks charge each other for overnight loans. The discount rate is the rate depository institutions pay when they borrow directly from the Federal Reserve.

The federal funds rate affects the prime rate, which is the interest rate banks charge their most-qualified clients for loans. The prime rate is usually about 3% higher than the fed rate; today it is 6.75%. It is likely to step higher in the coming days.

What is the prime rate expected to do now?

Since the FOMC Fed just raised the is monitoring economic conditions and holding off on adjusting the fed funds rate, the prime rate will likely move closer to 7% remain at 6.75%.

A look at the federal funds rate over the past 50 years: How has it changed?

The federal funds rate is a key tool used by the Federal Reserve to keep the economy running smoothly and manage inflation. Here's a closer look at the historical Fed interest rate over the past 50 years and how it compares to today.

Fed predictions for 2026: Will a rate hike happen by the end of the year?

Will the Fed cut or raise interest rates in 2026? We reached out to economic experts for their Fed rate predictions. Here's what they had to say.

What is the Federal Open Market Committee (FOMC)?

The Federal Open Market Committee makes decisions throughout the year that touch the financial lives of virtually every American. Here’s a look at what the FOMC does, current FOMC members, and how their decisions affect your money.

What a Fed rate hike means for your bank accounts, loans, credit cards, and investments

Here's how the Fed's rate decision could impact savings products, various types of loans, and credit cards.

Understanding the Fed's rate decisions: Do we want high or low interest rates​?

The Federal Reserve's interest rate decisions can directly impact your wallet. So what's better: high or low interest rates?

Should you open a CD account before the Fed's next meeting?

Knowing how the Federal Reserve's monetary policy decisions impact your interest earnings over time is key to making an informed decision about where to put your money.