Fed funds rate explained: US policy rate definition
By Ken Chigbo, Founder, KenMacro. Published 2026-05-13.
Quick answer
The Fed funds rate is the target range set by the Federal Open Market Committee for overnight unsecured lending between US banks. It anchors short-term dollar interest rates, influences every other US borrowing cost, and acts as the primary lever the Federal Reserve uses to manage inflation and employment.
What is Fed funds rate?
The Fed funds rate is the interest rate at which US depository institutions lend reserve balances to one another overnight on an unsecured basis. Since 2008 the Federal Reserve has set it as a target range, currently expressed as a 25 basis point band, rather than a single point. The effective Fed funds rate (EFFR) is the volume-weighted median of actual transactions, published daily by the New York Fed. The FOMC sets the range eight times per year at scheduled meetings, using administered rates such as interest on reserve balances (IORB) and the overnight reverse repo rate to keep EFFR inside the band.
How traders use Fed funds rate
Retail FX and macro traders track the Fed funds target range as the single most important input into dollar pricing. Rate expectations, not the current level, drive most of the move: traders watch Fed funds futures and SOFR futures to read the implied path, then compare that path with FOMC statements, the dot plot, and Chair press conferences. Institutional desks position duration and DXY exposure around shifts in the implied terminal rate and the timing of the first cut or hike. CPI, NFP, PCE, and JOLTS releases all matter because they move the expected path. Around FOMC decision days at 2pm ET, dollar pairs, gold, and US indices typically see elevated volatility for the following ninety minutes, with the press conference at 2:30pm ET often producing the larger move.
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Common misconceptions about the Fed funds rate
Three errors recur on retail desks. First, the Fed funds rate is not the rate banks charge customers; it is a wholesale interbank rate that feeds through to prime, SOFR, mortgage, and credit card pricing with lags. Second, the Fed does not directly set EFFR by decree; it steers it inside the target range using IORB, ON RRP, and reserve management. Third, a rate hold is not neutral for markets: if the implied path priced into futures expected a cut and the FOMC holds, the dollar typically bids and front-end yields rise even though nothing changed at the policy rate itself.
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Frequently asked
How often does the Fed change the Fed funds rate?
The FOMC holds eight scheduled meetings per year, roughly every six weeks, at which it can adjust the target range. Between meetings the rate is left unchanged barring emergency action, such as the inter-meeting cuts seen in March 2020. Most cycles see the committee move in 25 basis point increments, though 50 and 75 basis point moves occur when inflation or financial conditions demand a faster pace.
What is the difference between the Fed funds rate and SOFR?
The Fed funds rate is an unsecured overnight interbank rate set as a target range by the FOMC. SOFR, the Secured Overnight Financing Rate, is a secured rate based on actual Treasury repo transactions and is published by the New York Fed. SOFR replaced USD LIBOR as the benchmark for most floating rate loans and derivatives. The two rates usually trade within a few basis points of each other but can diverge during funding stress.
Why does the Fed funds rate move the dollar?
Higher US rates relative to other G10 economies raise the carry on holding dollars and attract capital into US fixed income, supporting DXY. The market prices the expected path of the Fed funds rate, not just the spot level, so dollar pairs react to anything that shifts that path: CPI surprises, payrolls, FOMC guidance, and the dot plot. A hawkish repricing typically lifts the dollar and pressures gold and risk assets.
Where can traders see the current Fed funds target range?
The Federal Reserve publishes the current target range on its website immediately after each FOMC decision in the policy statement. The effective Fed funds rate is published daily by the New York Fed at around 9am ET for the prior business day. Fed funds futures, traded on CME, show the market-implied probability distribution of where the range will sit at each future meeting.
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