Federal Funds Rate

The Federal Funds Rate is the Interest Rate at which depository institutions, such as banks and Credit unions, lend reserve balances to other depository institutions overnight on an unCollateralized basis. This rate is a critical Benchmark for other Interest Rates in the economy, influencing overall economic activity, inflation, and employment levels.

For example, if the Federal Reserve lowers the Federal Funds Rate, borrowing costs decrease, encouraging consumer spending and business investment. Conversely, raising the rate can help curb inflation by making borrowing more expensive.

In practice, if the Federal Funds Rate is set at 2.00%, a bank that borrows from another bank at this rate will need to pay 2% interest on the loan. This rate also affects various loans consumers may take out, including mortgages and personal loans.

During the 2008 financial crisis, the Federal Reserve drastically lowered the Federal Funds Rate to near zero to stimulate the economy. In contrast, in 2022 and 2023, the Fed raised the rate to coMBAt rising inflation, impacting lending rates across the economy.