Federal funds rate
The interest rate banks charge each other for overnight loans of reserves — the price the FOMC chooses in order to invite or restrain credit.
The federal funds rate is not set by the Federal Reserve directly. It is a market rate: the price at which banks lend reserve balances to one another overnight, without collateral.
What the Federal Open Market Committee sets is a target range for that rate — expressed as a quarter-point band. The Federal Reserve Bank of New York then uses its policy tools to keep the effective rate trading inside the band. The distinction matters when reading coverage: the committee announces an intention, and the implementation happens separately.
Holding the range below the level that would restrain credit is an invitation to more borrowing. More borrowing, in a banking system that creates deposits, is more money. Raising the range withdraws the invitation. Neither move is a weather report. See what happens when interest rates rise.
The rate matters far beyond interbank lending because so many other rates are priced off it, directly or by expectation. Mortgage rates are not: they track the ten-year Treasury.
A worked example
Suppose the Committee sets a target range of 3.50 to 3.75 percent. Overnight, banks with spare reserves lend to banks that need them; the rate they agree, averaged across the market, is the effective federal funds rate, and the New York Fed’s tools keep it inside the band — typically near the middle. A quarter-point cut moves the band to 3.25–3.50 percent, and the effective rate follows within a day. The numbers here are a worked example, not a claim about the current target.
Nothing about a mortgage or a savings account changes by decree. Lenders reprice their own products in response, quickly for products tied to short rates and more slowly for anything priced off longer Treasury yields.
How to read it in coverage
“The Fed raised rates to 3.75 percent” is shorthand for raising the upper bound of the target range to 3.75. The range is what the Committee decides; the effective rate is what the market produces inside it; the data page shows the range with its stamp. A headline about “interest rates” rising when the Fed did nothing is usually about Treasury yields, which move on expectations rather than on decisions. “The Fed had no choice” — the constraint is the price-level path it already allowed. The vote is still a vote.
It is the rate the FOMC targets. Every headline that says the Fed 'raised rates' or 'cut rates' is describing a change to the target range for this one rate.