Federal Funds Rate

The federal funds rate is the most important interest rate in the U.S. economy, set by the Federal Open Market Committee (FOMC).

How it works

• Banks are required to hold reserves at the Federal Reserve
• The fed funds rate is the rate banks charge each other for overnight loans of these reserves
• The FOMC sets a target range (e.g., 5.25%–5.50%)

Why it matters

The fed funds rate influences virtually every other interest rate:

• Mortgage rates: Rise and fall with the fed funds rate
• Credit card rates: Directly tied to the prime rate (fed funds + 3%)
• Savings account yields: Move with the fed funds rate
• Bond yields: Especially short-term Treasury yields

Impact on stocks

• Rate hikes: Increase borrowing costs, slow economy, typically pressure stock valuations
• Rate cuts: Stimulate borrowing and spending, often boost stock prices
• Expectations matter: Markets react to changes in expected future rates, not just current levels

FOMC meetings

The FOMC meets eight times per year. Traders closely watch the statement, dot plot, and press conference for signals.