What Is the Federal Funds Rate? Definition and How It Moves Markets
Author: Meesam Abbas | Last Updated: June 2026 | Sources: Federal Reserve, FRED, Bloomberg, CNBC, Reuters
The federal funds rate is the single most important interest rate in the world — the overnight borrowing rate set by the Federal Reserve that determines the cost of money across the entire US economy and, through the dollar's global role, across much of the world. As of June 17, 2026, the federal funds rate target range sits at 3.50% to 3.75%, following one of the most dramatic rate cycles in American history: a 525 basis point hiking campaign from 2022 to 2023, followed by 175 basis points of cuts through 2025. (Federal Reserve, June 2026) Every mortgage, every car loan, every savings account yield, and every stock market valuation in America is priced relative to where the federal funds rate sits today.
Key Takeaways
- The federal funds rate is "the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight" — the benchmark overnight rate that anchors all US interest rates. (Federal Reserve, June 2026)
- The current federal funds rate target range is 3.50% to 3.75% as of the June 17, 2026 FOMC meeting — held unanimously at 12-0 — with the effective federal funds rate at 3.60%. (Federal Reserve, June 2026; FRED, June 2026)
- The 2022–2023 hiking cycle raised the rate by 525 basis points in just 16 months — from near zero to 5.25%–5.50% — the fastest tightening cycle since the Fed began targeting the rate in 1982. The subsequent easing cycle cut it by 175 basis points through 2025.
- Jerome Powell stated in January 2026 that current policy "should help stabilize the labor market while allowing inflation to resume its downward trend toward 2% once the effects of tariff increases have passed." (Bloomberg, January 2026)
- A Reuters poll from June 2026 found approximately 70% of economists expected the federal funds rate to remain at its current 3.50%–3.75% range through the end of 2026 — with no further cuts expected in the near term given inflation running at 4.2%. (Reuters, June 2026)
- Current target range: 3.50%–3.75% — Federal Reserve, June 2026
- Most recent FOMC vote: Hold — unanimous 12-0, June 17, 2026 — Federal Reserve, June 2026
- Effective federal funds rate (June 17, 2026): 3.60% — FRED, June 2026
- 2022–2023 peak: 5.25%–5.50% (reached July 2023, fastest hike cycle since 1982)
- Total easing from peak to current: 175 basis points
- March 2026 FOMC vote: Hold — 11-0 — Federal Reserve, March 2026
- COVID-era low: 0.05% effective rate (April–May 2020) — FRED
- All-time high: 22.36% monthly average — July 1981, under Chair Paul Volcker
- March 2026 dot plot: FOMC projected one rate cut remaining in 2026
- 2026 FOMC remaining meetings: July 28–29, September 15–16, October 27–28, December 8–9 — Federal Reserve
What Is the Federal Funds Rate?
The Federal Reserve's official definition is precise: the federal funds rate is "the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight." (Federal Reserve, June 2026) In practical terms, this is the rate at which banks lend their excess cash reserves to each other for a single night — usually to meet short-term regulatory requirements. No ordinary consumer or business directly borrows at the federal funds rate. But virtually every interest rate they do pay is anchored to it.
The mechanism is straightforward. Banks are required to hold a certain amount of funds in reserve. On any given day, some banks have more than they need and others have less. Banks with excess funds lend to banks with shortfalls overnight. The rate they charge each other for this lending is the federal funds rate. FRED describes it as "the weighted average rate for all of these types of negotiations" — the market-determined rate that emerges from these overnight transactions. (FRED, June 2026)
The FOMC does not directly set this market rate — it sets a target range within which it wants the rate to trade, and then uses its policy tools to steer the actual rate into that range. The distinction between the target range (set by the FOMC) and the effective federal funds rate (the actual market rate) matters: as of June 17, 2026, the target range is 3.50%–3.75% and the effective rate is 3.60% — sitting precisely in the middle of the target range as intended. (FRED, June 2026)
Why does an overnight lending rate between banks matter to you? Because the federal funds rate influences "other interest rates such as the prime rate, which is the rate banks charge their customers with higher credit ratings" and "indirectly influences longer-term interest rates such as mortgages, loans, and savings." (FRED, June 2026) When the FOMC votes to change the federal funds rate, the effect ripples through the entire economy — from the rate on your credit card to the yield on your savings account to the discount rate used to value every publicly traded stock. Understanding the [Federal Reserve] and how it sets monetary policy is the essential starting point for understanding this rate's significance.
What Is the Federal Funds Rate Today? The 2026 Update
The FOMC's June 17, 2026 decision to hold the federal funds rate at 3.50%–3.75% was unanimous — 12 votes in favor of no change. (Federal Reserve, June 2026) The March 17, 2026 meeting produced the same outcome — an 11-0 vote to hold. (Federal Reserve, March 2026) Through the first half of 2026, the FOMC has maintained a consistent hold pattern — consistent in its votes and in its language about what it would take to move.
Jerome Powell, who remained on the Federal Reserve Board as a Governor after his chairmanship ended in May 2026, explained the Fed's position in January 2026: the current policy stance "should help stabilize the labor market while allowing inflation to resume its downward trend toward 2% once the effects of tariff increases have passed." (Bloomberg, January 2026) In March 2026, he elaborated: to resume cutting rates, officials would need to see "progress in reducing inflation, especially goods inflation that has been boosted by tariffs." (Bloomberg, March 2026)
The March 2026 dot plot — the FOMC's quarterly summary of each member's interest rate projections — showed the committee still expected one rate cut in 2026. That projection was made before US inflation reached 4.2% year-over-year in May 2026. A Reuters poll from June 2026 found approximately 70% of economists — 72 of 102 surveyed — expected the federal funds rate to stay at 3.50%–3.75% through year-end, with no imminent cut expected. (Reuters, June 2026) The remaining 2026 FOMC meetings — July 28–29, September 15–16, October 27–28, and December 8–9 — are all potential decision points, with September and December meetings accompanied by updated dot plots. (Federal Reserve, June 2026)
How the Federal Reserve Sets the Federal Funds Rate
The mechanics of how the Fed controls the federal funds rate changed significantly after the 2008 financial crisis. Before the crisis, the Fed used open market operations — buying and selling Treasury securities — to adjust the supply of reserves and push the federal funds rate toward its target. This approach worked when banks held minimal reserves and competed actively to borrow from each other.
After 2008, the Fed flooded the banking system with reserves through quantitative easing, which made the old approach unworkable. The primary tool is now Interest on Reserve Balances — the interest rate the Fed pays banks for the funds they hold as reserve balances at their local Federal Reserve Bank. Because banks can always earn IORB risk-free, they have no incentive to lend to other banks at rates below IORB. This creates an effective floor for the federal funds rate. (FRED, June 2026)
The Overnight Reverse Repurchase Agreement facility extends a similar floor to financial institutions that are not banks and therefore do not earn IORB — money market funds, government-sponsored enterprises, and similar entities. By setting the ON RRP rate slightly below IORB, the Fed creates a corridor within which the effective federal funds rate naturally settles. Together, these two tools allow the Fed to keep the actual overnight rate precisely within its target range without the constant open market operations that were required before 2008. The Federal Reserve's own diagram of the process describes it as the comparison of the Fed's administered rates with market rates that "encourages the latter to move down" or up as intended. (Federal Reserve, June 2026)
The FOMC votes on the target range at each of its eight annual meetings. The seven Board of Governors members all vote at every meeting. Five of the twelve regional bank presidents vote on a rotating basis, with the New York Fed president holding a permanent voting seat. The voting composition explains why the June 17, 2026 vote was 12-0 — all seven governors plus five rotating presidents were voting members at that meeting. For the full explanation of how the FOMC works and who sits on it, see [What Is the Federal Reserve? Definition, Role, and How It Affects You].
Federal Funds Rate History: From 22% to Near Zero and Back
The federal funds rate's all-time high was a monthly average of 22.36% in July 1981. Paul Volcker — appointed Federal Reserve Chair in 1979 — raised rates to that extraordinary level to break the double-digit inflation that had gripped the US economy for much of the 1970s. The medicine worked but the cost was severe: a painful recession in 1981–1982 drove unemployment to 10.8% before inflation collapsed and rates could be cut. The Volcker episode established the principle that the Federal Reserve's credibility — its willingness to cause short-term pain to restore price stability — is itself one of the most valuable assets in the US financial system.
The 2008 financial crisis produced the opposite extreme. The Fed under Ben Bernanke cut the federal funds rate to 0%–0.25% in December 2008 and held it there for seven years — the longest zero-rate period in US history. The effective rate hit its lowest point at approximately 0.07% during this era. When the Fed finally began raising rates in December 2015, the process was so gradual — typically 25 basis points per year — that it took three years to reach a peak of 2.25%–2.50% in December 2018.
The COVID-19 pandemic triggered another emergency response. The FOMC cut the rate to 0%–0.25% on March 15, 2020 — an emergency Sunday session that preceded the official meeting calendar. (Federal Reserve, March 2020) The effective rate reached its record modern low of 0.05% in April–May 2020. The Fed held the rate near zero for two years as it prioritized maximum employment recovery — a decision that contributed to the 2021–2022 inflation surge. The average federal funds rate since 1954 is 4.6% — meaning the current 3.50%–3.75% remains below the long-run historical norm despite seeming elevated to anyone who entered the market after 2008. For the broader context on how the Fed managed the post-COVID inflation surge through this rate cycle, see [What Is Inflation? Definition, Causes, and How It Affects Your Money].
The 2022–2026 Rate Cycle: The Fastest Tightening in Four Decades
The March 2022 decision to begin raising rates from near zero was the starting gun for the most consequential monetary policy cycle in decades. Inflation had surged to levels not seen since the early 1980s — driven by pandemic supply chain disruptions, massive stimulus spending, and surging demand as the economy reopened. The FOMC's initial response was cautious: a 25 basis point hike in March 2022. But as inflation continued rising, the pace accelerated dramatically.
In the second half of 2022, the FOMC delivered four consecutive 75 basis point hikes — moves of that magnitude had not been seen since the Volcker era. Between March 2022 and July 2023, the Fed raised rates by a total of 525 basis points — the fastest increase since the FOMC began formally targeting the rate in 1982, according to the Richmond Federal Reserve Bank. (Richmond Fed, 2023) The peak of 5.25%–5.50% was reached in July 2023 and then held steady for over a year through August 2024. At Jackson Hole in August 2022, Powell had framed the mission clearly: "Without price stability, the economy does not work for anyone."
The easing cycle began in September 2024 with a 50 basis point cut — larger than the typical 25 basis points — signaling the Fed's confidence that inflation had been meaningfully tamed. November and December 2024 each brought 25 basis point cuts, bringing the rate to 4.25%–4.50% at year-end 2024. In 2025, three more 25 basis point cuts followed in September, October, and December — the December 2025 cut being the sixth and final reduction in the cycle, bringing the rate to its current 3.50%–3.75%. Total easing from the 5.25%–5.50% peak: 175 basis points over approximately 15 months.
The tariff-driven inflation resurgence of 2026 has now interrupted what might otherwise have been a continued easing cycle. With CPI at 4.2% year-over-year in May 2026 and Powell citing goods inflation specifically as the barrier to further cuts, the 2024–2025 easing cycle appears to have ended at 3.50%–3.75% — at least until inflation returns sustainably toward 2%. For the full story of how tariffs are driving 2026's price pressures, see [What Are Tariffs and How Do They Affect Markets?].
How the Federal Funds Rate Affects Your Money
The prime rate is the most direct transmission point. The prime rate — formally tracked as the Wall Street Journal Prime Rate — is conventionally set at 3 percentage points above the federal funds rate target. At the current 3.50%–3.75% target, the prime rate sits at 6.50%–6.75%. Most variable-rate consumer loans — credit cards, home equity lines of credit, auto loans — are priced as a spread above the prime rate. When the FOMC votes to change the federal funds rate, credit card and HELOC rates typically adjust within the same billing cycle.
Mortgage rates work differently. The 30-year fixed mortgage rate is not directly tied to the federal funds rate — it moves primarily with the 10-year US Treasury yield, which reflects the market's expectations for long-term inflation and economic growth. However, the federal funds rate strongly influences those expectations: a higher federal funds rate signals that the Fed is keeping monetary conditions tight, which tends to push up 10-year yields and therefore mortgage rates even if the policy rate itself does not directly set them. The rapid rise in the federal funds rate from 0.25% to 5.50% between 2022 and 2023 pushed 30-year fixed mortgage rates from approximately 3% to over 7% — the sharpest affordability shock in the US housing market since the early 1980s.
Savers benefit from a higher federal funds rate in a straightforward way: money market funds, high-yield savings accounts, and Treasury bills all pay rates that move closely with the overnight rate. During the near-zero era from 2009 to 2022 — a combined period of approximately nine years — savings accounts paid effectively nothing. At the current 3.50%–3.75% federal funds rate, competitive high-yield savings accounts are offering returns that are genuinely attractive by any historical standard. The Federal Reserve's FRED database shows the effective federal funds rate has averaged 4.6% since 1954 — meaning the current rate is historically close to normal, even if it feels elevated after more than a decade of near-zero rates.
The Federal Reserve describes the full transmission mechanism as working through "short-term interest rates, changes in longer-term yields, credit conditions, exchange rates, and financial market valuations, which in turn influence spending and investment." (Federal Reserve, June 2026) Critically, the Fed also acknowledges that monetary policy operates with "long and variable lags" — the full economic effect of a rate change typically takes several quarters to a few years to fully work through the economy. This lag is why the Fed must act pre-emptively, raising rates before inflation peaks and cutting rates before recessions deepen — and why getting the timing right is genuinely difficult. For the connection between the federal funds rate and the broader [quantitative easing and tightening] framework, see our dedicated explainer.
How the Federal Funds Rate Moves Markets: Stocks, Bonds, and the Dollar
The relationship between the federal funds rate and stock market valuations is one of the most important and consistently misunderstood dynamics in investing. Higher interest rates compress stock valuations through two mechanisms. First, they raise the risk-free rate — the return available from Treasury securities with no credit risk — which makes equities less attractive relative to bonds. Second, they increase the discount rate used to calculate the present value of future corporate earnings: the same stream of future profits is worth less today when discounted at a higher rate. This is why growth stocks — which derive more of their value from distant future earnings — tend to fall more than value stocks when rates rise. (Federal Reserve, June 2026)
The 2022–2023 hiking cycle provided a real-time demonstration of this mechanism at scale. As the federal funds rate rose from near zero to 5.50%, the Nasdaq Composite fell more than 30% in 2022 — one of its worst annual performances in history — while the S&P 500 fell approximately 19%. The mechanism was precisely as theory predicts: the most highly valued growth stocks, whose prices reflected profits expected many years in the future, suffered the largest price declines as those future profits were discounted at higher rates.
For bond investors, the federal funds rate relationship is more direct but equally painful when rates rise. Bond prices move inversely to yields: when rates rise, existing bonds paying lower coupons become less attractive, so their prices fall. A 30-year Treasury bond purchased in 2020 at a 1.5% yield lost approximately 40% of its market value by 2023 as yields rose to over 4% — a loss larger than most equity bear markets, from an asset class supposed to be "safe." For a full explanation of how bond pricing and interest rates interact, see [What Is a Bond? Investment Bonds Explained].
For the US dollar, higher interest rates typically strengthen the currency. When the Fed raises rates, the return on dollar-denominated assets increases relative to assets denominated in other currencies. This attracts foreign capital into US markets — investors sell their local currency to buy dollars to invest in higher-yielding US assets — which strengthens the dollar exchange rate. The 2022 dollar surge — the US Dollar Index rose approximately 15% in a single year — was directly driven by the Fed's aggressive hiking cycle outpacing other central banks' tightening. This dollar strength had ripple effects globally: it raised the cost of dollar-denominated debt for emerging market governments and made US exports more expensive in foreign markets. For the connection between the dollar's global role and interest rate dynamics, see [What Is a Reserve Currency? How the Dollar Became Global Money].
Frequently Asked Questions
What is the federal funds rate?
The federal funds rate is the interest rate at which depository institutions — banks and credit unions — lend reserve balances held at the Federal Reserve to other depository institutions overnight. It is the benchmark overnight rate set by the Federal Open Market Committee and the starting point from which virtually all other US interest rates are derived. Changes in the federal funds rate ripple through to the prime rate, mortgage rates, savings account yields, Treasury bond yields, stock valuations, and the US dollar exchange rate.
What is the current federal funds rate?
The current federal funds rate target range is 3.50% to 3.75% as of the June 17, 2026 FOMC meeting — voted unanimously at 12-0 to hold unchanged. The effective federal funds rate — the actual market rate from overnight transactions — was 3.60% on June 17, 2026. The Fed has held the rate steady throughout 2026 while waiting for tariff-driven inflation to recede before considering further rate cuts.
What is the federal funds rate today vs its history?
The current federal funds rate of 3.50%–3.75% sits just below the long-run historical average of 4.6% since 1954. It is dramatically lower than the all-time high of 22.36% monthly average in July 1981 under Paul Volcker, and dramatically higher than the 0.05% effective rate reached during the COVID-19 pandemic in April–May 2020. The 2022–2023 hiking cycle raised the rate by 525 basis points in 16 months — from near zero to 5.25%–5.50% — the fastest tightening since 1982.
Who sets the federal funds rate?
The federal funds rate target range is set by the Federal Open Market Committee — the FOMC — which consists of the seven members of the Federal Reserve Board of Governors plus five of the twelve regional Federal Reserve Bank presidents on a rotating basis. The New York Fed president holds a permanent voting seat. The FOMC meets eight times per year and announces its rate decision at 2:00 p.m. ET on the second day of each scheduled meeting. Implementation uses Interest on Reserve Balances (IORB) and the Overnight Reverse Repurchase Agreement (ON RRP) facility.
How does the federal funds rate affect mortgage rates?
The federal funds rate does not directly set 30-year fixed mortgage rates — those are more closely tied to the 10-year US Treasury yield. However, the federal funds rate strongly influences those yields through its effect on inflation expectations and the overall interest rate environment. When the Fed raised the rate from 0.25% to 5.50% between 2022 and 2023, 30-year fixed mortgage rates rose from approximately 3% to over 7% — demonstrating the powerful but indirect connection between policy rates and housing affordability.
What is the federal funds rate dot plot?
The dot plot — formally the Summary of Economic Projections — is released four times per year (at the March, June, September, and December meetings) and shows each FOMC participant's anonymous forecast for where the federal funds rate will be at year-end over the next several years. The March 2026 dot plot showed FOMC members collectively expected one rate cut remaining in 2026. Dot plots are closely watched by markets as a signal of future rate direction but are not binding commitments — they change as economic conditions change.
How does the federal funds rate affect stocks?
Rising federal funds rates typically pressure stock valuations through two channels. First, higher rates make Treasury bonds more attractive relative to stocks, reducing demand for equities. Second, higher rates increase the discount rate applied to future corporate earnings, reducing their present value — particularly for growth stocks whose value is concentrated in distant future profits. The 2022 hiking cycle caused the Nasdaq Composite to fall more than 30% as rising discount rates compressed the valuations of high-growth technology companies. Falling rates typically have the opposite effect, supporting higher equity valuations.
What is the difference between the federal funds rate and the prime rate?
The federal funds rate is the overnight lending rate between banks — set by the FOMC as its monetary policy target. The prime rate is the rate banks charge their most creditworthy business and consumer customers — conventionally set at 3 percentage points above the federal funds rate. At the current federal funds rate of 3.50%–3.75%, the prime rate is 6.50%–6.75%. Credit card APRs, home equity lines of credit, and many variable-rate business loans are priced as spreads above the prime rate, which is why they adjust quickly when the FOMC changes the federal funds rate.
How long does it take for a federal funds rate change to affect the economy?
The Federal Reserve acknowledges that monetary policy operates with "long and variable lags" — the full economic effect of a federal funds rate change typically takes several quarters to a few years to fully work through the economy. Some effects are immediate: credit card APRs and savings yields adjust within billing cycles, stock markets react on the day of the FOMC announcement. Other effects take much longer: changes in business investment, housing construction, labor market conditions, and inflation typically take 12 to 24 months or more to fully reflect a policy change.
When will the Federal Reserve cut rates again?
As of June 2026, approximately 70% of economists in a Reuters poll expected the federal funds rate to stay at 3.50%–3.75% through year-end 2026. The primary obstacle to further cuts is inflation at 4.2% year-over-year — more than double the Fed's 2% target — driven substantially by tariff-related price increases. Powell stated in March 2026 that cuts would require "progress in reducing inflation, especially goods inflation that has been boosted by tariffs." The remaining 2026 meetings — July, September, October, and December — are all potential decision points.
What was the federal funds rate during COVID-19?
The Federal Reserve cut the federal funds rate to 0%–0.25% on March 15, 2020 — an emergency Sunday meeting — in response to the COVID-19 pandemic economic shock. The effective rate reached its record modern low of 0.05% in April and May 2020. The Fed held the rate near zero for two full years, until March 2022 — partly because unemployment recovery was the priority. That prolonged near-zero rate period contributed to the 2021 inflation surge that ultimately required the most aggressive hiking cycle in four decades to reverse.
Sources and Further Reading
- Federal Reserve. FOMC Press Release — June 17, 2026. June 2026. [https://www.federalreserve.gov/newsevents/pressreleases/monetary20260617a.htm]
- Federal Reserve. FOMC Press Release — March 17, 2026. March 2026. [https://www.federalreserve.gov/newsevents/pressreleases/monetary20260318a.htm]
- Federal Reserve. Federal Open Market Committee. June 2026. [https://www.federalreserve.gov/monetarypolicy/fomc.htm]
- Federal Reserve. Monetary Policy: What Are Its Goals and How Does It Work? June 2026. [https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm]
- Federal Reserve. FOMC Press Release — March 15, 2020 (COVID-19 Emergency Cut). March 2020. [https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm]
- FRED — Federal Reserve Economic Data. Effective Federal Funds Rate (EFFR). June 2026. [https://fred.stlouisfed.org/series/EFFR]
- FRED — Federal Reserve Economic Data. Federal Funds Effective Rate (FEDFUNDS). June 2026. [https://fred.stlouisfed.org/series/FEDFUNDS]
- Bloomberg. Fed Policy Should Stabilize Labor Market, Powell Says. January 2026. [https://www.bloomberg.com/news/videos/2026-01-28/fed-policy-should-stabilize-labor-market-powell-says-video]
- Bloomberg. Fed Holds Rates Steady, Still Projects One Rate Cut in 2026. March 2026. [https://www.bloomberg.com/news/articles/2026-03-18/fed-holds-rates-steady-still-projects-one-rate-cut-in-2026]
- Richmond Fed. A Rate Cycle Unlike Any Other. 2023. [https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-26]
The federal funds rate is the price of money itself — the single input that flows through every borrowing cost, every savings yield, every stock valuation, and every exchange rate in the US economy. As of June 2026, it sits at 3.50%–3.75%: below the all-time high, above the COVID-era zero, and on hold while the Fed waits for tariff-driven inflation to ease. For every investor, homeowner, saver, or business owner, understanding where the federal funds rate is — and where it is headed — is the foundation of understanding what the financial environment will look like in the months and years ahead. For the next layer of context, see [What Is the Federal Reserve? Definition, Role, and How It Affects You] and [What Is Inflation? Definition, Causes, and How It Affects Your Money].
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