What Is the Federal Funds Rate?
The federal funds rate doesn't just affect banks. It has ripple effects on the price of consumer products such as credit cards, student loans and mortgages.
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The current Fed rate is 4.25% to 4.50%. That’s according to the Federal Open Market Committee (FOMC), the monetary policymaking part of the Federal Reserve that holds eight scheduled meetings a year to set the federal funds rate.
What is the Fed funds rate?
The federal funds rate, or Fed rate, is the interest rate that U.S. banks pay one another to borrow or loan money overnight. It also affects interest rates on everyday consumer products, such as credit cards or mortgages.
Since banks hold reserves to conduct everyday business such as having enough liquidity and clearing payments, banks that need more reserves often borrow money from other banks.
Fed pauses rates, still projects two cuts in 2025
On Wednesday, the Federal Reserve Open Markets Committee extended the federal funds rate pause, as expected. The rate remains 4.25% to 4.50%.
It’s the second time the Fed has paused rates since it made cuts at its September, October and November meetings. For a year prior to the recent cuts, rates were paused 5.25% to 5.50%; the year-long pauses were preceded by 11 straight rate hikes. The current rate remains the lowest since January 2023.
When will the Fed cut rates next?
At the FOMC’s December meeting, a survey of FOMC members known as the "dot plot," showed that a majority of members project another 50 bps cut to 3.9% in total, by the end of 2025. The members’ median projection at the FOMC’s March meeting showed the same rate decrease by year’s end.
During a press conference following the rate announcement, Federal Reserve Chair Jerome Powell acknowledged that there is still uncertainty in how the Trump Administration’s recent trade, immigration, fiscal policy and regulation policy changes could affect the economy.
Recent policy decisions by President Donald Trump have begun to affect the markets, including widespread tariffs and mass federal job cuts. Some other concerning data has begun to appear including a slight uptick in unemployment, a decline in consumer spending, stubborn inflation and a sharp drop in consumer sentiment since the beginning of the year.
The FOMC’s forecasts lowered its economic growth projections for 2025, compared with its December forecast. It also increased its inflation expectations for the year. Powell says that while the risk of a recession has risen, it is not a high risk.
» MORE: How is the economy doing?
The Fed had been on track to reach its 2% inflation target, but there could be roadblocks ahead. Powell said, “We were getting closer to that, but tariff inflation may delay further progress.”
Powell said that the effects of tariffs on inflation aren’t entirely clear and could also be temporary. He said, "It can be appropriate sometimes to look through inflation if it’s going to go away quickly without action by us."
But elevated prices and the potential for tariffs to fuel inflation have directly led to consumer sentiment declining. Still, Powell said that consumer sentiment doesn’t always translate into actions. “There have been plenty of times where people are saying very downbeat things about the economy and then going out and buying a new car,” he said. “But we don't know that that will be the case here.”
Data reports will continue to guide the Federal Open Markets Committee’s upcoming actions.
Following Powell’s remarks, the futures market’s CME FedWatch Tool showed a high likelihood of a rate pause at its next meeting.
When is the next Fed meeting?
Who sets the Federal funds rate?
The Federal Open Market Committee sets the federal funds rate. The FOMC sets the target rate range, and sets the Fed rate to be aligned with that target range.
What is the current Fed interest rate?
Right now, the Fed interest rate is 4.25% to 4.50%. The FOMC set the rate at its Dec. 17-18 meeting and has maintained the rate since.
Here are the most recent Fed rates from FOMC meetings:
FOMC meeting dates | Rate change | Fed rate (as a target range) |
|---|---|---|
March 18-19, 2025. | None. | 4.25% to 4.50%. |
Jan. 28-29, 2025. | None. | 4.25% to 4.50%. |
» RELATED: Learn what basis points are
After sitting at 0% for two years during the coronavirus pandemic, the rate steadily climbed starting in March 2022, as the Federal Reserve aimed to combat inflation. But the climb stopped a year and a half later. The Fed then paused rates eight times between July 2023 and July 2024. In September, November and December 2024, the Federal Reserve decreased the federal funds rate.
» MORE: Understand how raising interest rates helps inflation
The FOMC meets next on May 6-7, 2025.
What happens when the Fed raises interest rates?
First, some context on Fed rate hikes. The Federal Reserve raises the federal funds rate to curb inflation. When it increases the Fed rate, banks pay more to borrow money from one another. When the federal funds rate rises, it doesn’t just affect banks sending and receiving money. Those banks pass on that expense to customers by charging higher interest rates on products like credit cards and mortgages. The idea is that by increasing the cost of credit, demand for goods and services will fall, causing their prices to subsequently fall, too.
Here’s why that happens: The Federal Reserve can change only the federal funds rate. But since that rate is tied to other rates and variables, those changes have wide-reaching effects. When the Fed rate goes up, it’s more expensive for banks to borrow money. So it gets more expensive for consumers to borrow money, too. Anything tied to financing, including credit cards, car payments, student loans or mortgages, can get pricier.
On the other hand, a rising rate can lead to higher yields for savers and better rates for CD investors in some bank accounts.
» MORE: See our CD rates forecast
What happens when the Fed lowers interest rates?
When the Federal reserve lowers the federal funds rate, banks pay less to borrow money from one another. Banks, in turn, lower interest rates on loans (including mortgages) and credit cards, lowering the cost of borrowing money to buy cars, homes and other big purchases. The stock market is likely to be affected by a lower Fed rate hike, with stock prices growing. All of these factors are intended to induce economic growth. With borrowing costs lowered, consumers have incentive to spend and invest more.
Unfortunately, lower interest rates at banks due to a lower Fed rate means that deposit account interest rates will fall, too. So annual percentage yields on deposit products such as CDs, savings and interest-bearing checking accounts will decline as well.
The Federal Reserve paused on changes to the federal funds rate starting in July 2023, keeping rates steady for more than a year. As such, bank interest rates generally remained flat starting in September 2023 until 2024 when interest rates began to fall. In anticipation of a drop, banks started lowering rates on deposit accounts such as savings and certificates of deposit. The Federal Reserve dropped its interest rate three times in 2024: by 50 basis points in September to 4.75% to 5.00%, then by 25 basis points in November to 4.50% to 4.75% and by 25 basis points again in December to 4.25% to 4.50%.
» Are rates going up or down? Check out NerdWallet’s savings forecast
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How does the Fed raise interest rates?
The Federal Open Market Committee, a 12-member group of banking leaders from around the country, sets the federal funds rate and much of the Federal Reserve’s monetary policy. It meets eight times a year and sometimes makes rate changes — including increases or decreases — outside its scheduled meetings.
Here's the 2025 FOMC meeting schedule:
Jan. 28-29.
March 18-19.
May 6-7.
June 17-18.
July 29-30.
Sept. 16-17.
Oct. 28-29.
Dec. 9-10.
What is the Federal Reserve Board?
The Federal Reserve Board is the umbrella agency that governs the Federal Reserve System. It comprises three groups: the 12 Federal Reserve Banks in the U.S., the Board of Governors and the Federal Open Market Committee.
The Federal Reserve Board is responsible for the Federal Reserve achieving its three Congressional mandates: maintaining maximum employment, steady prices on goods and services, and moderate interest rates throughout the country.
