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Fed Facts: Understanding the federal funds rate

The Federal Open Market Committee (FOMC) recently met for the first time of the year. This month’s Fed Facts article will cover the federal funds rate and one of the mechanisms that the FOMC uses to conduct monetary policy.

The FOMC meets eight times per year and consists of seven governors, the president of the Federal Reserve Bank of New York and four rotating slots shared by the 11 remaining Federal Reserve Bank presidents. The Reserve Bank presidents who are nonvoting members (i.e. off-rotation) still attend all the meetings and offer policy input. Their agenda includes reviewing economic and financial conditions, determining the appropriate monetary policy stance and assessing the risks to its long-run goals of price stability and sustainable economic growth. Minutes of these meetings are typically released three weeks after the date of the policy decision. Check out the FOMC Meeting calendars and information (Off-site) page to learn more.

2020 FOMC meeting schedule

  • January 28-29
  • March 17-18*
  • April 28-29
  • June 9-10*
  • July 28-29
  • September 15-16*
  • November 4-5
  • December 15-16*

* Meeting associated with a Summary of Economic Projections.

Federal funds target rate

Media coverage of FOMC meetings typically focuses on the 12 voting members’ decision on whether to adjust the federal funds target rate. The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other depository institutions in need of larger balances. In simpler terms, a depository institution with excess cash, also known as liquidity, will lend to another depository institution that needs to raise liquidity quickly.

The rate that the borrowing institution pays to the lending institution is determined between the two institutions. The weighted average rate for all of these types of negotiations is called the effective federal funds rate. The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target.

The federal funds rate is the central interest rate in the U.S. financial market. It influences other interest rates such as the prime rate, which is the rate that depository institutions charge their customers with higher credit ratings. Additionally, the federal funds rate indirectly influences longer- term interest rates such as mortgages, loans and savings.

At its latest meeting, the FOMC voted to keep the target range for the federal funds rate at 1.5 to 1.75%. Read the Board’s press release (Off-site) for more information on this meeting.

Effective federal funds rate

The graph below, published by the Federal Reserve Bank of St. Louis’ FRED Economic Data (Off-site), shows how the effective federal funds rate has changed over time.

Effective federal funds rates and change over time

Shaded areas indicate U.S. recessions

Open market operations

The Federal Reserve influences the effective federal funds rate through open market operations (OMOs) (Off-site). These operations help the effective federal funds rate reach the federal funds rate target by influencing the cost and availability of money and credit in the U.S. economy by buying or selling government securities to adjust reserve levels in the banking system. Section 14 of the Federal Reserve Act grants the Federal Reserve the authority to conduct OMOs.

The resulting investments from OMOs are held in the System Open Market Account (SOMA) (Off-site), which is managed by the Federal Reserve Bank of New York. These securities serve as collateral for U.S. currency in circulation and other liabilities on the Federal Reserve System's balance sheet. They also serve as a tool for the Federal Reserve’s management of reserve balances and a tool for achieving the Federal Reserve’s macroeconomic objectives.

Learn more

For more information, visit the Monetary Policy (Off-site) section of the Board of Governors website. You can also check out The Federal Reserve System: Purposes and Functions (Off-site) publication, which provides an overview of the Federal Reserve System, monetary policy and the structure and members of the Board of Governors.