Federal funds rate: What it is and how it affects you

Core Points - The Federal Open Market Committee (FOMC) lowered the federal funds rate for the first time in 2025 on September 17, with expectations of two more cuts by year-end [1] - The current federal funds rate is set between 4.00% and 4.25% [2][8] - The federal funds rate is the interest rate at which banks lend to each other for overnight loans, influencing overall borrowing costs in the economy [2][7] Summary by Sections Federal Funds Rate Overview - The federal funds rate is a target range set by the Federal Reserve for interbank overnight loans, with banks negotiating specific rates within this range [2] - The effective federal funds rate (EFFR) is the median rate charged for these loans, currently reflecting a real fed funds rate of 4.33% [8] Federal Reserve's Role - The Federal Reserve, through the FOMC, meets eight times a year to decide on adjustments to the federal funds rate, impacting economic conditions [4][5] - The Fed adjusts the rate to manage inflation and stimulate or slow down the economy as needed [6] Impact on Consumers and Markets - Changes in the federal funds rate affect consumer interest rates, including those for loans and credit cards, although they do not directly set mortgage rates [7][10] - The prime rate, which is typically about 3 percentage points higher than the federal funds rate, is currently at 7.50% and is expected to decrease following the recent rate cut [10][11]