Federal Funds Rate
The federal funds rate is the US benchmark interest rate set by the Fed, and the anchor for dollar pricing across all maturities.
The federal funds rate is the US benchmark interest rate the Fed sets, anchoring borrowing costs across the economy. Higher rates attract capital and tend to strengthen the dollar.
The federal funds rate is the interest rate at which US banks lend reserves to each other overnight, and the benchmark rate the Federal Reserve targets through its policy decisions. It is the anchor for US borrowing costs across the economy, from mortgages to corporate debt, and the starting point for the interest-rate differentials that drive currency flows. When the Fed raises it, the dollar tends to strengthen; when it cuts, the dollar tends to weaken.
How It Works
- Set by the FOMC as a target range, currently expressed as a band like 3.75-4.00%
- Influences every US rate from mortgages to credit cards
- Its gap versus other countries' rates drives currency carry flows
Trading Tips
Watch expected cuts priced into futures, not the current rate
Payroll and CPI weeks move expectations fastest
Compare against other central banks for currency direction
Federal Funds Rate Example
Say the Fed lifts the funds rate from 5.00% to 5.25%. Prime-linked loans, credit cards and new mortgages all reset higher within weeks, corporate borrowing costs climb, and the dollar firms as yield gaps widen against low-rate currencies.
How Traders Use Federal Funds Rate
Track the expected path, not the current level: markets move on changes to coming cuts or hikes. Fed funds futures show the bet. Your job is judging whether data supports it.
Related Terms
Sources
- Federal ReserveOfficial rate announcements
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