Federal Funds Rate
The overnight interest rate at which U.S. banks lend reserve balances to each other — the primary policy rate the Fed targets to steer the economy.
The Federal Funds Rate is the rate at which depository institutions lend reserve balances held at the Federal Reserve to other banks overnight. It is the anchor for short-term borrowing costs throughout the entire U.S. financial system.
The FOMC sets a target range for the fed funds rate. All short-term rates — from T-Bills to SOFR to prime lending rates — track the fed funds rate closely. When the Fed hikes, borrowing becomes more expensive economy-wide; when it cuts, financial conditions ease.
For traders, the fed funds rate and its expected path (priced in the fed funds futures market) is the single most important variable driving duration risk, credit spreads, and equity valuations. A 25bp surprise hike can ripple across every asset class within seconds.