Understanding the Fed Funds Rate

The federal funds rate — often shortened to fed funds rate or Fed rate — is the key interest rate set by the Federal Reserve, the central bank of the U.S. The federal funds rate is often referred to as the fed benchmark rate because it serves as a reference point for interest rates throughout the U.S. financial system.

Changes in the federal funds rate affect interest rates on all types of loans and savings products, which in turn influence the overall economy. Here’s more about how the federal funds rate works and how it affects your wallet.

What is the federal funds rate?

The federal funds rate, set by the Federal Open Market Committee (FOMC), is the rate commercial banks use when lending to each other overnight. The FOMC is the Fed’s chief body for monetary policy that meets eight times a year — and as needed — to establish a target range for the rate.

The federal funds rate, also known as the federal funds rate target, is a range with upper and lower limits that are typically 0.25 percentage points apart.

The Fed uses the federal funds rate to influence financial conditions. Changes in the rate can trigger events that affect a range of variables to support job growth and economic activity.

What is the current federal funds rate?

The federal funds rate is 5.25% to 5.50%, which the FOMC set in July 2023. The Federal Reserve has chosen not to change the rate since then, ending a period of 11 straight rate increases.

The table below shows changes in the federal funds rate since January 2023.

Source: Federal Reserve

Federal funds rate history: 1980 to 2024

The federal funds rate rises and falls repeatedly as the Fed responds to ever-changing economic conditions. Here’s a look at the benchmark rate over four decades to understand its importance.

1980s: When the decade began, the U.S. economy was in a state of “stagflation”, in which both high inflation and high unemployment were occurring. The Federal Reserve focused on reducing inflation, though it resulted in periods of high joblessness.

In 1981, the FOMC’s actions resulted in the federal funds effective rate reaching as high as 19% — the highest rate ever. The record-high federal funds rate temporarily worsened the unemployment rate. It had reached almost 11% in 1982. Inflation fell, even though it wasn’t a steady decline.

1990s: The 1990s began with a recession, although it lasted only eight months — from July 1990 to March 1991. To fight it, the FOMC reduced the federal funds target rate from 8.25% at the start of 1990 to 3.00% by September 1992.

After 1991, the U.S. economy remained free of recessions for 10 years. In fact, the period from 1993 to 2000 reflects the strongest economic performance since the 1960s. From 1994 through the rest of the 1990s, the FOMC only made relatively small changes to the federal funds rate to contain inflation pressures or to reduce adverse effects from global economic problems.

2000s: The dot-com bubble that started in the late 1990s and peaked in early 2000 transitioned into the dot-com crash, which led to the 2001 recession. The FOMC lowered the federal funds target rate to combat the effects of the recession from 6.50% in January 2001 to 1.00% by June 2003.

As the economy recovered and then started to grow, the Fed began a long series of rate increases. The federal funds rate climbed from 1.00% in June 2004 to 5.25% in June 2006.

Then came the housing bubble that formed in 2006 and 2007 — and burst in 2008. It resulted in the Great Recession and prompted the FOMC to drop the fed funds rate to near zero, which held into the 2010s.

2010s: A sluggish economic recovery from the Great Recession led the FOMC to keep the federal funds rate at its effective floor of 0.00% to 0.25% until December 2015. As conditions improved, the Fed raised the rate nine times from December 2015 to December 2018, when the target range reached a peak of 2.25%-2.50%.

Economic activity slowed in 2019, which resulted in the FOMC suspending further rate increases in the first half of 2019 and then shifting to rate cuts. The Fed lowered rates three times to a target range of 1.50%-1.75% by October 2019.

2020s: The coronavirus outbreak in early 2020 was a major global shock that disrupted U.S. economic activity. In March 2020, the FOMC responded with two emergency meetings that lowered the federal funds rate to zero.

The massive policy response from both the Federal Reserve and Congress provided unprecedented stimulus to the economy. But as the economy recovered in 2021 and 2022, inflation increased to levels not seen in decades.

The FOMC acted quickly and raised the federal funds rate between March 2022 and July 2023 to today’s target range of 5.25%-5.50%. In the second half of 2023, inflation had eased some. But as of May 2024, inflation still remains elevated, and the fed funds target range is holding steady at 5.25%-5.50%.

How does a change in the federal funds rate affect you?

A change in the federal funds rate has an immediate effect on short-term interest rates.

An increase in the federal funds rate can spike costs for borrowers if their variable rates rise on credit cards and loans. For savers, a higher rate can increase interest earnings on savings accounts and money market funds.

Increasing borrowing costs will generally rein in consumer and business spending. The result can be businesses shedding jobs, giving fewer raises and holding off on hiring. Price increases on goods and services may subside or even decline with less spending and fewer jobs.

The opposite occurs when the federal funds rate declines. The cost of borrowing falls, and this encourages spending and promotes job growth. But it also puts upward pressure on the price of goods and services, plus interest earnings on savings can drop.

Even a shift in expectations for the federal funds rate can affect rates overall — in particular, longer-term interest rates. Bond yields, CD rates and mortgage rates can rise when the federal funds rate is also expected to rise.

Fed rate outlook

After more than nine months with the federal funds rate at a 23-year high, inflation has surprised many economists by remaining elevated enough to deter the FOMC from lowering the federal funds rate. When the federal funds rate is high, it’s typically expected that the economy will slow and inflation will cool.

The Fed’s latest projections point to inflation remaining above its 2% target through the end of 2025.

The Fed had forecasted three rate cuts for 2024 based on inflation moving toward that goal. Although inflation has eased over the past year, it remains elevated, the Fed said in a statement after its May policy meeting. The committee “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

That means you can likely expect fewer than three rate cuts in 2024. Higher borrowing costs will persist but so will higher savings rates.

Frequently asked questions

How is the fed funds rate different from the prime rate?

The federal funds rate is a benchmark interest rate set by the FOMC and used by banks when lending to each other overnight. The prime rate is based on the federal funds rate and is the rate that banks charge their best customers. Typically, the prime rate is 3 percentage points higher than the federal funds rate.

What effect did the pandemic have on the federal funds rate?

The effects of the pandemic resulted in a surge of inflation lasting longer than the Fed had expected. The FOMC’s efforts to combat the inflation has brought a fast rise in the federal funds rate to a 23-year high of 5.25%-5.50%. This rate has lasted more than nine months and may stick around longer because of progress on inflation stalling.

What is the Federal Reserve and what does it do?

The Federal Reserve is the central bank of the U.S. Its main tasks are managing the country’s monetary policy, including setting the federal funds rate; maintaining a stable financial system; ensuring safe and sound banks; facilitating U.S.-dollar transactions and payments; and promoting consumer financial protections.