The federal funds rate is what banks charge each other to borrow reserves overnight, unsecured. It is also the Federal Reserve's main policy lever. Eight times a year the FOMC sets a target range for it (4.25 to 4.50%, for example), then steers whatever actually trades inside that range using interest on reserves and the reverse repo facility.
Every other US rate prices off it. The 2-year Treasury is barely more than a forecast of its average path. SOFR trades within a few basis points of it. Mortgages, credit cards and corporate loans reprice on expectations of where it is heading. All the talk about "cuts priced in" comes from fed funds futures, which convert straight into odds for each meeting.
It normally moves in 25bp steps. A 50bp move, up or down, means the Fed thinks something needs dealing with in a hurry. The number printed each day, the effective fed funds rate or EFFR, is the volume-weighted median of what actually traded, and it normally sits glued to one level inside the range.
Say the target range is 4.25 to 4.50% and December fed funds futures imply an average rate of 3.97%. That is about 40bp under the current midpoint, so the market is pricing roughly one and a half 25bp cuts by December. Then CPI comes in hot the next morning and the implied rate jumps to 4.12%. One release just took nearly a whole cut back out.
