Federal funds target range

What the federal funds target range is

The federal funds rate is the interest banks charge each other to borrow reserve balances overnight, the money they keep in their accounts at the Federal Reserve Banks. The Fed does not fix that rate. The Federal Open Market Committee sets a target range for it, a quarter of a percentage point wide, and steers the market rate into the range. The committee, the seven Fed governors and five of the twelve Reserve Bank presidents, holds eight scheduled meetings a year. Its statement on longer-run goals sets out the aims: maximum employment, and inflation of 2% measured by the price index for personal consumption expenditures.

Two rates the Fed administers keep the market inside the range. It pays interest on reserve balances, and no bank will lend reserves overnight for less than it earns by leaving them at the Fed. The overnight reverse repurchase facility does the same job for money market funds and other firms that cannot hold reserves: it takes their cash overnight at an offering rate, which the latest implementation note sets at the bottom of the range.

How a change reaches your mortgage

Most American home buyers take a 30-year fixed-rate mortgage, and the funds rate does not price it directly.

• 30-year fixed. Lenders sell most conforming loans to investors as mortgage-backed securities, so their rates follow what investors demand, which tracks the 10-year Treasury yield far more closely than the funds rate. A decision moves fixed rates mainly when it changes what markets expect: a cut that everyone saw coming may move nothing on the day, while a surprise can move them a lot. Freddie Mac's weekly survey on the 30-year mortgage rate tracker shows where fixed rates actually sit, and the 15-year tracker does the same for the shorter term.
• Adjustable-rate mortgages. An ARM is fixed for an opening period, often five, seven or ten years, then resets to a short-term index plus a margin. The index is usually a short-term rate such as the Secured Overnight Financing Rate, which moves closely with the funds rate. A change today reaches your ARM at its next reset, limited by the caps in your note.
• HELOCs. A home equity line of credit is usually priced at the prime rate plus a margin. Banks have long moved prime in step with the target, and the Fed's H.15 release publishes it. Most credit card rates are tied to prime the same way, which is why a decision shows up on your card statement within a cycle or two.

To see what a different rate does to the monthly payment, put it into the mortgage calculator; for a card balance, the credit card payoff calculator shows what a higher APR costs.

How it reaches your savings

High-yield savings accounts, mostly at online banks, compete on rate and tend to move within weeks of a decision, in either direction. A certificate of deposit fixes its rate for the term, so a CD opened before a cut keeps paying the old rate until it matures, though taking the money out early usually costs a penalty.

Money market funds hold Treasury bills and overnight repurchase agreements, including lending to the Fed's own facility, so their yields follow the range closely and quickly. They are investments, not deposits: the SEC explains that they can lose value, while bank deposits are insured by the FDIC to at least $250,000 at each insured bank.

The savings goal calculator and the compound interest calculator take the rate your account pays. Use the APY your bank quotes, not the funds rate.

Reading the chart and the table

The chart draws the target as a band that steps at each change and holds until the next decision. Each row is the date a new target took effect, matching the Fed's own table of changes. Since March 2017 that has been the day after the statement announcing it, so the date in the table is one day later than the meeting.

The range itself began on 16 December 2008. Before that the committee set a single target rate, so earlier rows show the same figure as both the bottom and the top, a band with no width. The series starts on 27 September 1982, when the daily target series published by the Federal Reserve Bank of St. Louis begins; that first row is the target then in force, not a change. Until February 1994 the committee did not announce its target when it changed it, so those early dates were not public at the time.

What the page does not show is the effective federal funds rate, the average rate banks actually traded at, which usually sits inside it.