The Federal Funds Rate: The Fed's Primary Tool, Explained

The federal funds rate, in its most literal, technical sense, is simply the interest rate banks charge each other for overnight loans of reserves — a rate most people will never directly borrow or lend at, and yet it's the single number that ends up shaping mortgage rates, credit card rates, savings account yields, and borrowing costs across the entire economy. Since December 2008, the Fed sets this as a target RANGE (such as 5.25%–5.50%) rather than one precise fixed number, a shift that dates specifically to the emergency rate cuts of the 2008 financial crisis.

The transmission from this single overnight interbank rate to the rates you actually see happens because banks' own cost of funds changes when the fed funds rate changes — as their cost of borrowing (from each other, and effectively from the broader financial system) rises or falls, they adjust the rates they charge consumers and businesses accordingly. A higher fed funds rate target generally means higher rates on new mortgages, auto loans, and credit card balances, while also typically pushing savings account and CD yields somewhat higher too.