Federal funds rate

The Federal funds rate is the interest rate that banks charge each other on an overnight sale of immediately available funds (balances at the U.S. Federal Reserve) to another depository institution.

Fed funds rates will vary from day to day and from depository institution to depository institution. The Federal Open Market Committee sets a target level for the Fed funds rate by examining a number of economic indicators. An actual decline in the rate stimulates economic growth, but an excessively high level of economic activity can cause inflation pressures to build to a point that ultimately undermines economic expansion. An actual rise in the rate curbs economic growth and helps contain inflation, and thus can help sustain an economic expansion. Too great a rise, however, can retard economic growth too much. The FOMC's actions on the target federal funds rate attempt to achieve the maximum rate of economic growth consistent with price stability and moderate long-term interest rates.