Money & Finance › The Fed, money supply & inflation › Monetary policy: steering interest rates and credit
The federal funds rate
· Concept
Fact, law or dataA rule, statute, definition or measured number.
The federal funds rate is the overnight interest rate banks charge each other, and the Fed's main policy target.
See it on the Money & Finance map →How it works
The FOMC sets a target range a quarter-point wide; the New York Fed publishes the actual average daily. Since 2008 the Fed steers it mainly by setting the interest it pays banks on reserves. Banks set the prime rate 3 points above the range's top, and credit cards and many business loans key off prime. The range was near zero in 2020–22, peaked at 5.25–5.50% in 2023–24, fell to 3.50–3.75% by December 2025 and rose to 3.75–4.00% in September 2026.
Why it matters
It is the economy's base rate, flowing into T-bills, prime-based loans and, indirectly, mortgages and cap rates. Savers earn close to it in T-bills or money market funds.
Think of it like
Like a market's base rent: most other loan rates are quoted as a spread above it.
Facts, rules and data
FOMC statements announce each decision; the New York Fed publishes the effective rate each morning. Data on FRED go back to 1954.
Debates and risks
How high the 'neutral' rate is, neither speeding nor slowing the economy, is unknown; Fed officials' estimates range from roughly 2.5% to 4%.
Inside this (2)
Connections (15)
▸Federal Open Market Committee (FOMC) sets the target range for The federal funds rateFact, law or data
The connection
Fed funds is the rate banks charge each other for overnight loans of reserves. The FOMC sets a target range a quarter point wide, such as 3.50–3.75% in December 2025, and keeps the market rate inside it mainly through interest on reserves. Other short rates, from T-bills to prime-based loans, then follow.
When and why
Decisions announced publicly since 1994 and set as ranges since December 2008; voted on at each of the FOMC's eight yearly meetings.
How we know
The New York Fed publishes the effective federal funds rate daily; it has stayed inside the target range on almost every day.
Debates and risks
As interbank lending shrank after 2008 the fed funds market became thin; some argue a broader repo rate such as SOFR should become the target.
▸Open market operations were the classic tool for steering The federal funds rateFact, law or data
The connection
Before 2008, reserves were scarce. Buying Treasuries added reserves, so banks had spare cash to lend overnight and the fed funds rate fell; selling drained reserves and pushed it up. The New York desk did this daily. Since 2008, interest on reserves sets the rate, and open market operations mainly manage the balance sheet.
When and why
The New York Fed's trading desk, running open market operations since the 1920s under FOMC direction from the mid-1930s; the fed funds rate became its main target in the decades before 2008.
How we know
Fed histories and operations data show the daily trades keeping the rate near target; the Fed formally adopted its 'ample reserves' system in 2019.
Debates and risks
Whether the Fed should return to a smaller balance sheet with scarce reserves, steering rates through daily trades again, is debated.
▸Interest on reserve balances (IORB) is the main tool for steering The federal funds rateFact, law or data
The connection
With trillions in reserves, banks rarely need to borrow overnight, so the Fed cannot move fed funds by adjusting the supply of reserves. Instead it sets IORB inside its target range. Banks will not lend for much less than IORB, so raising IORB pulls the fed funds rate up with it.
When and why
Paid since October 2008; made the main tool under the 'ample reserves' framework the FOMC formalized in January 2019.
How we know
New York Fed daily data show the effective fed funds rate tracking IORB closely, usually a few hundredths of a point below it.
Debates and risks
Fed funds trades below IORB because big lenders such as the Federal Home Loan Banks cannot earn IORB, so the 'floor' leaks; how much this matters is debated.
▸Treasury bills (T-bills) yield nearly in step with The federal funds rateFact, law or data
The connection
A T-bill and an overnight loan of bank reserves are both near-riskless short loans, so their rates cannot drift far apart: if bills paid much less, money funds and banks would park cash at the Fed's facilities instead. Bill yields therefore track the fed funds rate and move ahead of expected Fed moves.
When and why
Daily in US money markets. As the Fed hiked in 2022–23, 3-month bill yields rose from near zero to above 5%.
How we know
Decades of daily data, such as the 3-month bill and effective fed funds series on FRED, show the two moving almost together.
Debates and risks
Bills can break from the Fed's rate during debt-ceiling standoffs, surges in bill supply or flights to safety; how far they can diverge is unsettled.
▸The federal funds rate sets the prime rate behind Consumer credit: credit cards, auto and student loansFact, law or data
The connection
By long convention, big banks set their prime rate 3 points above the top of the Fed's target range. Credit cards and home-equity lines charge prime plus a margin, so their rates reset within a billing cycle or two of a Fed move. New auto and personal loans reprice more gradually.
When and why
Prime has tracked fed funds plus 3 since the mid-1990s; the September 2026 hike to 3.75–4.00% lifted prime to 7.00%.
How we know
The Wall Street Journal's prime rate survey of the largest banks; card agreements stating 'prime plus' margins; the Fed's G.19 data on card rates.
Debates and risks
Card rates average over 20%, far above prime; the CFPB found in 2024 that card margins over prime hit records. Whether that reflects risk or weak competition is debated.
▸The federal funds rate anchors the short end of The yield curve: interest rates across maturitiesFact, law or data
The connection
The Fed holds the overnight rate inside its target range, and one- to three-month Treasury bills trade close to it, since money funds can hold either. Further out, yields depend on where investors expect the Fed to go plus a term premium, so the Fed's grip loosens with maturity.
When and why
In 2022–23, hikes lifted three-month bill yields from near 0% to about 5.5% while 10-year yields rose less, inverting the curve.
How we know
The Treasury's daily yield curve and FRED data show bill yields moving almost one-for-one with fed funds, and long yields moving far less.
Debates and risks
After the Fed cut a full point in late 2024, the 10-year yield rose about a point. How much control the Fed has over long rates is debated.
▸The federal funds rate rose sharply in 2022–23, triggering Commercial real estate stress (2023–)Mainstream view
The connection
The Fed raised its target from near zero in March 2022 to 5.25–5.50% by July 2023. Floating-rate loans' interest costs more than doubled, and buyers demanded higher cap rates. Since value equals NOI divided by the cap rate, a move from 5% to 6.5% cuts value about 23% with NOI unchanged. Maturing loans could not refinance at their old size.
When and why
FOMC decisions from March 2022 to July 2023, the fastest hikes since the early 1980s; hardest hit were 2021-vintage floating-rate apartment and office loans.
How solid is the link?
Property price indexes from Green Street and MSCI fell as rates rose, and CMBS delinquencies climbed in step, per Trepp data.
Debates and risks
How much damage is cyclical, easing as the Fed has cut since late 2024, versus structural from remote work, is debated.
▸The 2021–23 inflation surge forced fast hikes in The federal funds rateFact, law or data
The connection
With CPI inflation reaching 9.1% in June 2022, the Fed reversed course. From March 2022 to July 2023 it raised the fed funds target from near zero to 5.25–5.50%, including four three-quarter-point hikes, the fastest tightening since the early 1980s.
When and why
FOMC meetings in Washington, March 2022 to July 2023, under Chair Jerome Powell.
How we know
Published FOMC statements and the New York Fed's daily effective-rate data record each step.
Debates and risks
Critics argue the Fed started too late, having called inflation 'transitory' in 2021; whether hikes or supply recovery did more to cool it is debated.
▸The 2026 Iran-war oil shock and the Fed's return to hikes prompted the first hike since 2023 in The federal funds rateFact, law or data
The connection
Facing renewed inflation, the Fed chose to tighten rather than look past the oil spike. In September 2026 it raised the target range a quarter point to 3.75–4.00%, its first hike since July 2023, after cutting through late 2024 and 2025.
When and why
FOMC meeting, September 2026, under Chair Kevin Warsh, who succeeded Jerome Powell in May 2026.
How we know
The FOMC's September 2026 statement and the New York Fed's effective-rate data.
Debates and risks
Central banks often 'look through' supply shocks; whether hiking into an oil shock was right, or risks recession, is debated.
▸Interest-rate caps on floating-rate loans soared in cost during 2022–23 hikes in The federal funds rateMainstream view
The connection
From March 2022 to July 2023 the Fed raised its target from 0–0.25% to 5.25–5.50%, and SOFR followed. Caps bought cheaply at 1–3% strikes went deep in the money, and replacement caps cost far more because expected rates and volatility were higher: by many reports, ten times or more their 2021 price.
When and why
In US floating-rate CRE lending, 2022–24, as bridge loans written in 2021 reached extension dates that required new caps.
How solid is the link?
The Fed's rate history, cap pricing from hedging advisers, and mortgage REIT disclosures of borrowers' cap costs and loan modifications.
Debates and risks
With the Fed hiking again in September 2026, whether cap costs climb as in 2022–23 depends on how far markets expect rates to go.
▸Swap breakage: the cost (or refund) of unwinding a swap early often turned into refunds after 2022 hikes in The federal funds rateFact, law or data
The connection
Owners who fixed swaps at 1–2% in 2020–21 saw market swap rates jump to about 4–5% after the Fed's 2022–23 hikes. Their swaps became assets: ending them early meant the bank paid the owner, sometimes hundreds of thousands of dollars on a mid-size loan. Swaps fixed near 2023's highs moved the other way as rates fell in 2024–25.
When and why
Across US bank swap loans; many owners who sold or refinanced in 2022–24 collected termination payments.
How we know
The Fed's rate history, published swap-rate data, and bank termination statements showing payments to borrowers.
Debates and risks
Whether to break a valuable swap or keep it to the end depends on where rates go next, which no one can forecast.
▸The CRE maturity wall and maturity defaults was made worse by 2022–23 hikes in The federal funds rateFact, law or data
The connection
The Fed raised its target from near zero in March 2022 to 5.25–5.50% by July 2023. Treasury yields and CRE loan rates followed, from about 3–4% to 6–7%. At those rates the same NOI supports roughly a quarter to a third less debt, and higher cap rates cut values, so many maturing loans could not refinance in full.
When and why
Across US commercial real estate, 2022–25; office buildings and floating-rate loans were hit hardest.
How we know
FOMC decisions, the Fed's H.15 yield data, MBA and Trepp loan data, and Green Street and MSCI price indexes.
Debates and risks
How much of the office slump is rates versus remote work, and whether lower rates alone would fix it.
▸Global money flows: how capital moves between countries ebb and flow with The federal funds rateMainstream view
The connection
When the Fed raises rates, dollar assets pay more, money flows to the US, the dollar rises, and countries with dollar debts face outflows. When it cuts, money seeks higher yields abroad. Economist Hélène Rey found in 2013 that Fed policy drives a common 'global financial cycle' in flows and asset prices.
When and why
Volcker's hikes before the 1982 Latin American debt crisis, the 2013 'taper tantrum' and the 2022 hikes are classic cases.
How solid is the link?
Rey's 2013 Jackson Hole paper and later IMF and BIS research linking flows to US rates and market volatility.
Debates and risks
How far floating exchange rates protect other countries from the Fed's cycle is debated.
▸Emerging-market debt: dollar bonds, local bonds and Brady bonds suffers when the Fed raises The federal funds rateMainstream view
The connection
When the Fed raises rates, dollar loans cost more, the dollar strengthens and investors pull money from riskier markets, so countries with heavy dollar debts struggle to repay. Volcker's hikes preceded Mexico's 1982 default, 1994's hikes the peso crisis, and 2022's helped push Sri Lanka and Ghana into default.
When and why
Washington and world markets, in 1982, 1994, the 2013 'taper tantrum' and 2022.
How solid is the link?
IMF and BIS studies of the 'global financial cycle' and fund-flow data from EPFR.
Debates and risks
How much of the damage comes from the Fed itself versus the countries' own policies.
▸CRE capital markets: deal volume and the cap-rate cycle roughly halved in 2023 after hikes in The federal funds rateFact, law or data
The connection
The Fed raised its rate from near zero to over 5% in 2022–23. Loan rates followed, so buyers' debt costs rose above many property yields, making deals unprofitable unless prices fell. Sellers refused to cut, so transactions dried up: US sales fell 51% in 2023 to about $374 billion (MSCI).
When and why
US-wide; hikes ran from March 2022 to July 2023, and deal volume bottomed in 2023 before recovering in 2024–26.
How we know
MSCI Real Capital Analytics transaction data, Fed rate decisions, and Green Street price indexes.
Debates and risks
How far rates must fall to restore 2021-style volume, and whether long-term Treasury yields matter more than the Fed's rate, is debated.