What Is the Federal Funds Rate?
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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.
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.
Fed cuts rates at December meeting
Updated on Dec. 18.
On Thursday, the Federal Open Markets Committee cut the federal funds rate for the third time in a row, bringing the rate down by 25 bps. The rate is now 4.25% to 4.50%.
The cuts at the last three meetings arrived after more than a year of pausing interest rates at 5.25% to 5.50%. Before that, the Fed hiked rates 11 times in an effort to fight inflation. The new rate is the lowest since January 2023.
In a press conference following the announcement, Fed Chair Jerome Powell said that this time, the decision to cut the federal funds rate was a “closer call” than the two prior cuts. He said that while inflation is slowing and still on track to the Fed’s target rate of 2%, the labor market doesn’t need any further cooling.
"We do think the labor market is still cooling by many measures and we’re watching that closely,” he said.
What’s going on in the economy?
The Fed had multiple data reports since its November meeting including a strong inflation report showing an annual rate increase of 2.8% — a slight uptick from the previous month, but significantly lower than annual rates in 2023, according to the personal consumption expenditures price index (PCE), minus volatile food and energy; the core PCE is the Fed’s preferred measure of inflation.
Meanwhile, the labor market has eased. Unemployment, which was at 4.2% in November, has gone up slightly since hitting a more than 50-year low of 3.4% in April 2023. However, at its current pace, Powell said, “Job creation is below the level that would hold the unemployment rate constant."
When will the Fed cut rates next?
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.
On the possibility of future rate cuts, Powell said, “We're going to be looking for further progress on inflation, as well as continued strength in the labor market. And as long as the economy and the labor market are solid, we can be cautious as we consider further cuts.”
In reference to the upcoming presidential transition, Powell said that some of the FOMC members incorporated the uncertainty about inflation and potential policy shifts into their forecasts.
“The point about uncertainty is it's kind of common sense thinking that when the path is uncertain, you go a little bit slower,” said Powell. “It's not unlike driving on a foggy night or walking into a dark room full of furniture — you just slow down.”
Following Powell’s remarks, the futures market’s CME FedWatch Tool predicted the strong likelihood of a rate cut at the FOMC’s Jan. 28-29 meeting.
Data reports will continue to guide the Federal Open Markets Committee’s upcoming actions.
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.
Here are the most recent Fed rates from FOMC meetings:
FOMC meeting dates | Rate change | Fed rate (as a target range) |
|---|---|---|
Dec. 17-18, 2024. | Decrease of 25 basis points (or 0.25 percentage point). | 4.25% - 4.50%. |
Nov. 6-7, 2024. | Decrease of 25 basis points (or 0.25 percentage point). | 4.50% - 4.75%. |
Sept. 17-18, 2024. | Decrease of 50 basis points (or 0.50 percentage point). | 4.75% - 5.00%. |
July 30-31, 2024. | None. | 5.25% - 5.50%. |
June 11-12, 2024. | None. | 5.25% - 5.50%. |
April 30-May 1, 2024. | None. | 5.25% - 5.50%. |
March 19-20, 2024. | None. | 5.25% - 5.50%. |
Jan. 30-31, 2024. | None. | 5.25% - 5.50%. |
» 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 Jan. 28-29, 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
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.
