What Is the Federal Funds Rate?

What Is the Federal Funds Rate?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

The Federal Funds Rate refers to the interest rate at which depository institutions such as banks extend overnight loans to each other. The Federal Reserve, the central banking system of the United States, uses this rate as a key tool to control monetary policy, economic growth, and inflation.

Related Questions

1. Who sets the Federal Funds Rate?

The Federal Open Market Committee (FOMC), a branch of the Federal Reserve, is responsible for setting the Federal Funds Rate. Their decision is primarily based on current economic conditions and predicted trends.

2. How does the Federal Funds Rate affect the economy?

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The Federal Funds Rate impacts the interest rates banks charge individuals and businesses for loans. When the Federal Funds Rate is low, borrowing costs drop, encouraging spending, which can stimulate economic growth. Conversely, high rates make borrowing expensive, cooling spending and potentially slowing the economy.

3. How often is the Federal Funds Rate reviewed?

The FOMC typically meets eight times a year to assess whether the Federal Funds Rate needs to be modified. However, they can call emergency meetings whenever necessary to address severe economic fluctuations promptly.

4. How does the Federal Funds Rate impact inflation?

The Federal Funds Rate directly affects the rate of inflation. When rates are low, there tends to be more money in circulation, which can lead to higher inflation. Conversely, when rates are high, there is less money in circulation, potentially slowing inflation.

5. What’s the relationship between the Federal Funds Rate and mortgage rates?

While the Federal Funds Rate doesn’t directly set mortgage rates, they are influenced by it. If the Federal Funds Rate rises, mortgage rates typically increase as well, and vice versa. Thus, the Federal Funds Rate can impact anyone planning to buy a house or refinance a current mortgage.