US Macro

The Federal Funds Rate

The federal funds rate is the Federal Reserve's primary monetary-policy instrument — the overnight rate at which banks lend reserves to each other. Setting this rate is the single most consequential decision the Fed makes; it cascades through every interest rate in the US economy and through every dollar-denominated financial asset globally.

May 14, 2026DFFfed-policy · us-macro · monetary-policy · interest-rates

FED_FUNDS

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The most powerful single number in modern finance. When the Federal Open Market Committee announces a change to the federal funds target range at 2:00 PM Eastern Time on FOMC days, every interest rate in the world repositions: bonds reprice, mortgages adjust, currencies move, equity discount rates shift, and trillions of dollars of financial assets find new equilibrium prices over the following hours and days. No other monetary or fiscal authority controls a single rate that produces transmission of this magnitude through global markets.

FED_FUNDS

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What it measures

The federal funds rate is the overnight rate at which depository institutions lend reserves to each other:

The series we track — FRED DFF — is the Effective Federal Funds Rate (EFFR), the volume-weighted median of actual overnight federal funds transactions, published daily by the NY Fed. EFFR typically sits a few basis points below the upper bound of the target range and is the rate that all other dollar-denominated short-term rates anchor to.

FOMC decisions are made eight times per year at scheduled meetings (plus rare unscheduled meetings during crises). The Fed publishes a "Summary of Economic Projections" (the "dot plot") at four of the eight meetings (March, June, September, December), showing each FOMC member's projection for the federal funds rate over the next 3-5 years.

Why it matters

Two angles.

The rate-anchor angle. Every other interest rate in the US economy is, in some sense, a function of expected federal funds rate path plus a term premium and/or credit spread. The 2-year Treasury yield is dominated by expected federal funds rate over 2 years. The 10-year Treasury yield is dominated by expected federal funds rate over 10 years plus term premium. Mortgage rates track UST10Y. Credit card rates track UST2Y plus a spread. Floating-rate loans reset to SOFR, which tracks federal funds. The federal funds rate is therefore the gravitational center of the entire US interest rate complex; when the FOMC moves it, the entire rate landscape reshapes.

The asset-valuation angle. Equity discount rates, real estate cap rates, corporate borrowing costs, and the relative attractiveness of every yield-bearing asset all flow from the federal funds rate. The 2022 equity bear market was substantially a discount-rate-driven re-pricing as the federal funds rate moved from 0% to 5%+. The 2024 equity recovery was substantially a discount-rate-driven re-rating as the federal funds rate began coming down. For long-duration assets (growth stocks, real estate, infrastructure projects, multi-decade insurance liabilities), Federal Reserve policy is the single largest valuation input.

What moves it, and what it moves

Moves the federal funds rate (FOMC decisions):

Inflation trajectory. Higher inflation → tighter policy. Sticky inflation kept rates elevated through 2023-2024.
Labor market conditions. Tight labor markets argue for higher rates; weakening labor markets argue for cuts.
GDP growth. Strong growth allows the Fed to hold rates higher for longer; weakness pulls cuts forward.
Financial stability. Bank failures (March 2023), sovereign stress (May 2025 US downgrade), or credit-market dysfunction can prompt emergency easing.
Inflation expectations (both market-implied and survey-based). Anchored inflation expectations support holding rates; rising expectations argue for tightening.

The federal funds rate moves:

UST2Y and the entire Treasury yield curve. Most directly — UST2Y moves nearly 1-for-1 with shifts in Fed policy expectations.
Mortgage rates (with a lag, via UST10Y).
Equity multiples (via discount-rate channel).
The US dollar (DXY tends to strengthen with hikes, weaken with cuts).
Emerging-market currencies and credit (US tightening pressures EM with capital outflows).
Bank profitability (net interest margins, deposit costs, loan-portfolio mark-to-market).
Real estate and commercial property valuations.

A worked example: the 2022-2023 hiking cycle

The Fed entered March 2022 with the target range at 0.00-0.25% — where it had been since the COVID emergency cuts of March 2020. Inflation had risen to 7.9% YoY by February 2022, and the Fed had been signaling for months that tightening was imminent.

The sequence of hikes:

March 2022: +25 bp → 0.25-0.50%
May 2022: +50 bp → 0.75-1.00%
June 2022: +75 bp → 1.50-1.75% (the first 75bp hike since 1994)
July 2022: +75 bp → 2.25-2.50%
September 2022: +75 bp → 3.00-3.25%
November 2022: +75 bp → 3.75-4.00%
December 2022: +50 bp → 4.25-4.50%
February 2023: +25 bp → 4.50-4.75%
March 2023: +25 bp → 4.75-5.00%
May 2023: +25 bp → 5.00-5.25%
July 2023: +25 bp → 5.25-5.50% (terminal)

Total: 525 basis points over 16 months — the fastest hiking cycle since Paul Volcker's anti-inflation campaign in 1979-1981. CPI YoY peaked at 9.1% in June 2022 and declined steadily from there to roughly 2.5% by mid-2024.

The 16-month hike-pause-hike phase ended in July 2023. The Fed then held the target range at 5.25-5.50% for 14 months — the longest hold at a terminal rate in any modern cycle. Inflation continued declining through this period; the unemployment rate began rising; the labor market visibly softened.

The cut cycle began September 18, 2024 with a jumbo 50bp cut to 4.75-5.00% — larger than the 25 bp markets had been positioning for. Subsequent cuts at the November 2024 (-25 bp) and December 2024 (-25 bp) meetings brought the target range to 4.25-4.50% by year-end 2024. The pace and depth of further cuts through 2025 has been the subject of ongoing debate.

The 2022-2023 cycle accomplished its primary goal — reducing inflation from a 9.1% peak to roughly 2.5-3% — without (yet) producing a NBER-declared recession. The "soft landing" outcome is one of the more remarkable monetary-policy results of the post-war era.

The current cycle, and the open question

The structural debate:

Terminal cut level. Where does the federal funds rate settle? Three positions: (a) back to ~2.5% (the pre-COVID post-GFC norm); (b) ~3.0-3.5% (the current Fed dot-plot median for the "longer-run rate"); (c) ~4.0%+ (the regime-change view, with structurally higher real rates).
R-star uncertainty. The neutral real rate (r-star) is unobservable; estimates range from 0.5% to 2.5% real, implying nominal neutral of 2.5-4.5%. The Fed's reaction function depends on its estimate of r-star, but r-star itself is contested.
Inflation re-acceleration risk. If inflation re-accelerates — from tariff-policy effects, immigration restrictions on labor supply, fiscal deficits, or geopolitical commodity shocks — the Fed may have to halt or reverse the cutting cycle, creating substantial market volatility.
Recession-arrival timing. The Sahm Rule triggered in 2024 without producing an NBER-declared recession yet. If labor market dynamics worsen, the Fed could accelerate cuts; if they stabilize, the cutting pace stays measured.

What you watch: each FOMC meeting (8x per year, schedule published in advance); the quarterly SEP releases for dot-plot dynamics; the policy statement and Powell's press conference each meeting; intermeeting Fed communications (speeches by voting members); Fed Funds futures (CME's FedWatch tool aggregates the futures-implied probability distribution); and the entire macro indicator dashboard that feeds the Fed's reaction function (CPI, NFP, GDP, etc.).

FAQ

How does the Fed actually 'set' the federal funds rate?

The Fed doesn't directly set the rate — it sets a target range and uses operational tools to keep the market rate within that range. The two main tools as of 2025: (1) Interest on Reserve Balances (IORB) — banks earn IORB on the reserves they hold at the Fed; this sets an effective floor on the federal funds rate because banks won't lend reserves to each other for less than they could earn from the Fed; (2) Overnight Reverse Repo Facility (ON RRP) — money market funds can place cash at the Fed overnight at a rate near the bottom of the target range; this provides an additional floor. The actual federal funds rate trades within the target range, very close to IORB most of the time, set by the supply-and-demand of the interbank reserve market. The Fed doesn't trade in the federal funds market directly — instead, it manipulates reserves and IORB to influence where the market rate trades.

What's the difference between the federal funds rate target and the effective federal funds rate?

The TARGET is what the FOMC announces — currently a range (e.g., 4.50-4.75% as of mid-2025, having come down from the 5.25-5.50% peak). The EFFECTIVE federal funds rate (EFFR) is the volume-weighted median rate at which actual overnight unsecured federal funds transactions cleared yesterday — calculated by the NY Fed from real transaction data. EFFR typically sits a few basis points below the upper bound of the target range. When you see 'the federal funds rate' quoted in a news article, the speaker usually means either (a) the midpoint of the target range, or (b) EFFR — they're close enough that it doesn't matter for casual conversation. We track DFF (Daily Federal Funds Rate) which is EFFR. The FOMC's policy decisions affect the TARGET RANGE; the operational tools (IORB, RRP) keep the EFFR within that target.

Why is the federal funds rate so important when most loans don't directly use it?

Because it sets the anchor for every other rate in the economy. The 2-year Treasury yield is approximately the expected average federal funds rate over the next 2 years (plus a small term premium). Mortgage rates track the 10-year Treasury, which is the expected average federal funds rate over the next 10 years (plus a larger term premium). Credit cards, auto loans, and most floating-rate corporate debt explicitly reset against the federal funds rate (or close substitutes like SOFR). When the Fed changes the federal funds rate, every other rate in the financial system eventually reprices to a new equilibrium. The transmission is fast for short-duration assets (UST2Y reacts in seconds) and slower for long-duration assets (mortgage rates take 2-4 weeks).

What is 'r-star' (the neutral rate) and why does it matter?

r-star is the theoretical neutral real interest rate — the level at which monetary policy is neither stimulative nor restrictive, holding inflation stable at the Fed's 2% target. The Fed's estimate of nominal neutral rate has fluctuated: from around 4% pre-2008, down to ~2.5% in the post-GFC era of low rates, and increasingly back upward toward 3.0-3.5% in current Fed dot-plot estimates. r-star matters because the Fed targets it implicitly: when the federal funds rate is well above r-star, monetary policy is restrictive; when below, stimulative. The Fed's 'long-run' dot in its quarterly Summary of Economic Projections is essentially the FOMC's median estimate of nominal r-star — currently around 3.0-3.5%. Whether the post-COVID era has structurally shifted r-star higher is one of the most consequential debates in macroeconomics.

What was the 2022-2023 hiking cycle, and how did it compare historically?

It was the fastest hiking cycle since Paul Volcker's anti-inflation campaign in the early 1980s. Starting from a target range of 0.00-0.25% in March 2022, the Fed raised rates 11 times over the next 16 months: 25 bp (Mar 2022), 50 bp (May), 75 bp (Jun, Jul, Sep, Nov), 50 bp (Dec), 25 bp (Feb 2023, Mar 2023, May 2023, Jul 2023). Total cumulative: 525 basis points over ~16 months, ending at a 5.25-5.50% target range. For comparison: the 2004-2006 cycle raised rates 425 bp over ~24 months; the 1994-1995 cycle raised 300 bp over ~12 months; the Volcker cycles of 1979-1981 raised rates over 1,000 bp at various periods. The 2022-2023 pace was historically aggressive but the cumulative magnitude was less than Volcker's. The hiking cycle ended in July 2023 with the Fed signaling that further increases were unlikely; the first cut came in September 2024.