What is Federal Funds Rate

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The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve Bank. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall. Banks with excess money in their reserves can earn interest by lending it to other banks facing a shortfall.

The Federal Open Market Committee (FOMC), the monetary policy-making body of the Federal Reserve System, meets eight times a year to set the federal funds rate. The FOMC makes its decisions about rate adjustments based on key economic indicators that may show signs of inflation, recession, or other issues.