The federal funds rate, or Fed rate, is the target interest rate set by the Federal Open Market Committee (FOMC) at which commercial banks borrow and lend their excess reserves to each other for short amounts of time (usually overnight).
The Federal Open Market Committee (FOMC), the monetary policy-making body of the Federal Reserve, holds meetings eight times a year to set the federal funds rate
The federal funds rate can have a short-term effect on consumer loans and credit card rates, as well as the securities market.
Banks must maintain a reserve of a certain percentage of their deposits in the Federal Reserve Bank account by law. The amount of money a bank must keep in its Fed account is known as the reserve requirement and is based on a percentage of the bank’s total deposits.
The target rate value by the Federal Reserve System is achieved through open market operations. Since the Fed can’t establish the exact rate value through such operations, the real value may be more or less than the target value.
The federal funds rate is one of the most important interest rates in the US economy since it affects monetary and financial conditions. In turn, this affects key aspects of the broader economy, including employment, economic growth, and inflation.