Fed Funds Rate

The federal funds rate is the interest rate banks charge each other for overnight, unsecured loans of reserves, and, by extension, the Federal Reserve’s primary policy lever. The FOMC sets a target range (for example 4.25–4.50%) at its eight yearly meetings, and steers the effective rate inside it using interest on reserves and the reverse repo facility.

Every other US interest rate keys off this anchor. The 2-year Treasury is essentially a forecast of its average path; SOFR trades within a few basis points of it; mortgages, credit cards, and corporate loans reprice off expectations about where it is heading. That is why markets obsess over “cuts priced in”: fed funds futures translate directly into meeting-by-meeting odds.

• Standard moves are 25bp increments; 50bp signals urgency in either direction.
• The effective fed funds rate (EFFR) is the volume-weighted daily print, normally glued to a single level inside the range.

Worked example: The target range is 4.25–4.50% and the December fed funds futures contract implies an average rate of 3.97%. That gap of roughly 40bp below the current midpoint means the market prices about one and a half 25bp cuts by December. A hot CPI print the next morning lifts the implied rate to 4.12%, nearly a full cut priced out in one release.