What is the Federal Funds Rate?
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Updated May 3, 2023 to reflect the latest Fed rate change.
Current rate: The Fed rate is currently 5% to 5.25%. That’s according to the Federal Reserve, which meets eight times a year to set the federal funds rate.
The federal funds rate, or Fed rate, is the interest rate that U.S. banks pay one another to borrow or loan money overnight. It also affects interest rates on everyday consumer products, such as credit cards or mortgages.
Since banks are required to keep a minimum amount of money in reserves, banks with excess reserves often loan money to banks that can’t meet those requirements.
Right now, the Fed interest rate is 5% to 5.25%. After sitting at 0% for more than a year during the coronavirus pandemic, the rate has steadily climbed since March 2022 as the Federal Reserve aims to combat rising inflation.
The Federal Open Market Committee sets rates. The committee meets next on June 13-14, 2023.
What happens when the Fed raises interest rates?
First, some context on Fed rate hikes. The Federal Reserve raises the federal funds rate to curb inflation. When it increases the Fed rate, banks pay more to borrow money from one another. Those banks pass on that expense to customers by charging higher interest rates on products like credit cards and mortgages. The idea is that by increasing the cost of credit, demand for goods and services will fall, causing their prices to subsequently fall, too.
When the federal funds rate rises, it doesn’t just affect banks sending and receiving money. Interest rates also increase on other forms of debt, including money borrowed via credit cards, mortgages and loans.
Here’s why that happens: The Federal Reserve can change the federal funds rate only. But since that rate is tied to other rates and variables, those changes have wide-reaching effects. When the fed rate goes up, it’s more expensive for banks to borrow money. So it gets more expensive for consumers to borrow money, too. Anything tied to financing, including credit cards, car payments, student loans or mortgages, can get pricier.
On the other hand, a rising rate can lead to higher yields for savers in some bank accounts.
How does the Fed raise interest rates?
The Federal Open Market Committee, a 12-member group of banking leaders from around the country, sets the federal funds rate and much of the Federal Reserve’s monetary policy. It meets eight times a year and sometimes makes rate changes – including increases or decreases – outside its scheduled meetings.
Federal Open Market Committee meetings in 2023:
June 13 - 14, 2023.
July 25 - 26, 2023.
Sept. 19 - 20, 2023.
Oct. 31 - Nov. 1, 2023.
Dec. 12 - 13, 2023.
What is the Federal Reserve Board?
The Federal Reserve Board is the umbrella agency that governs the Federal Reserve System. It comprises three groups: the 12 Federal Reserve Banks in the U.S., the Board of Governors and the Federal Open Market Committee.
It’s responsible for the Federal Reserve achieving its three congressional mandates: maintaining maximum employment, steady prices on goods and services, and moderate interest rates throughout the country.