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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 between each other within that range set by the Federal Reserve.

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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.

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.

The Fed has not adjusted the fed funds rate so far in 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.

Learn how the federal funds rate has changed over the last 50 years

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.

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.

Learn how inflation affects mortgage rates.

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.

Everything is impacted:

Interest paid on savings and money market accounts

Interest paid on high-yield savings accounts

Interest paid on certificates of deposit

Interest charged on credit cards

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.

How Fed rate moves affect your bank accounts, loans, credit cards, and investments.

The federal funds rate is the interest rate 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 lowered to 3.50% to 3.75%, the EFFR is expected to be between those two numbers. The real fed funds rate is 3.64% today.

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 percentage points higher than the fed rate; today it is 6.75%.

Since the Fed is monitoring economic conditions and holding off on adjusting the fed funds rate, the prime rate will likely remain at 6.75%.

Laura Grace Tarpley edited this article.

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.

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