What Is the Federal Funds Rate?
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Updated on Nov. 7.
On Thursday, the Federal Open Markets Committee cut the federal funds rate for the second time in a row bringing the rate down by 25 bps. The rate is now 4.50% to 4.75%.
The cuts at both the FOMC’s September meeting and this one 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 February 2023.
In a press conference following the announcement, Fed Chair Jerome Powell said, “We're in the process of moving [our policy stance] down over time to a more neutral level. And, as a general matter, as we move ahead, we are prepared to adjust our assessments of the appropriate pace and destination as the outlook evolves.”
He added this example of how the FOMC might adjust its policy: “If we were to see the labor market deteriorating, we'd be prepared to move more quickly,” he said. “Alternatively, as we approach levels that are plausibly neutral or close to neutral, it may turn out to be appropriate to slow the pace at which we're dialing back restriction.”
What’s going on in the economy?
Fed had multiple data reports since its September meeting including a strong inflation report showing a rate of 2.7%, 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. The Fed’s target rate is 2%.
Meanwhile, the labor market has eased, but still remains strong. Unemployment, which was at 4.1% in October, has gone up slightly since hitting a more than 50-year low of 3.4% in April 2023. That bump in unemployment was largely due to the aftermath of two hurricanes in the South and a wide scale strike at Boeing, which has since ended.
Will the presidential election outcome impact rate decisions?
The FOMC met shortly after former President Donald Trump won his bid for the White House.
Of the election, Powell said that, in the near term, it would not affect the Fed’s policy decisions, adding that the “timing and substance” of any of the new administration’s policy changes are unclear. “We don't guess, we don't speculate and we don't assume,” Powell said.
In the past and while campaigning, Trump has expressed a desire to bring the Fed under direct control of the president. Trump has also criticized Powell, whom he appointed. Powell was questioned whether he would step down if Trump asked him to leave. He said, “No.” He was also asked whether the president has the power to force him or any of the Fed’s governors to step down. He responded, “Not permitted under the law.”
When will the Fed cut rates next?
At the Fed’s September meeting, a survey of FOMC members known as the "dot plot", showed that a majority of members expect a 50 bps cut, in total, by the end of the calendar year. The next dot plot will be released at the FOMC’s December meeting.
On the possibility of future rate cuts, Powell indicated that current policy is still “restrictive.” In other words, expect more cuts ahead.
Following Powell’s remarks, the futures market’s CME FedWatch Tool predicted the strong likelihood of a rate cut at the FOMC’s Dec. 17-18 meeting. The tool also projects 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.
The current Fed rate is 4.50% to 4.75%. 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.
What is the current Fed interest rate?
Right now, the Fed interest rate is 4.50% to 4.75%. The FOMC set the rate at its Nov. 6-7 meeting.
Here are the most recent Fed rates from FOMC meetings:
FOMC meeting dates | Rate change | Fed rate (as a target range) |
|---|---|---|
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 and November 2024, the Federal Reserve decreased the federal funds rate.
» MORE: Understand how raising interest rates helps inflation
The FOMC meets next on Dec. 17-18, 2024.
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 by 50 basis points in September 2024 to 4.75% to 5.00%, then by 25 basis points in November 2024 to 4.50% to 4.75%.
» 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 FOMC meeting schedule in 2024:
Jan. 30-31.
March 19-20.
April 30 - May 1.
June 11-12.
July 30-31.
Sept. 17-18.
Nov. 6-7.
Dec. 17-18.
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.
