Federal Funds Rate
The overnight interest rate at which U.S. banks lend reserve balances to each other — the primary policy rate the Fed targets to steer the economy.
The Federal Funds Rate is the rate at which depository institutions lend reserve balances held at the Federal Reserve to other banks overnight. It is the anchor for short-term borrowing costs throughout the entire U.S. financial system.
The FOMC sets a target range for the fed funds rate. All short-term rates — from T-Bills to SOFR to prime lending rates — track the fed funds rate closely. When the Fed hikes, borrowing becomes more expensive economy-wide; when it cuts, financial conditions ease.
For traders, the fed funds rate and its expected path (priced in the fed funds futures market) is the single most important variable driving duration risk, credit spreads, and equity valuations. A 25bp surprise hike can ripple across every asset class within seconds.
Related Terms
Basis Point
One hundredth of one percentage point (0.01%) — the standard unit for quoting changes in interest rates, yields, and credit spreads.
BeginnerBreakeven Inflation Rate
The inflation rate at which a nominal Treasury and a same-maturity TIPS deliver equal returns — the market's priced-in inflation expectation.
AdvancedCarry (Rates)
In fixed income, the net income earned by holding a bond position after financing costs — positive carry means the bond yields more than its funding rate.
AdvancedCME FedWatch
A CME tool that converts 30-day Fed Funds futures prices into market-implied probabilities of Fed rate moves at upcoming FOMC meetings.
IntermediateCurve Flattening
When the yield spread between long- and short-term Treasuries narrows — short yields rising faster than long yields, or long yields falling faster.
AdvancedDiscount Rate
The interest rate the Federal Reserve charges commercial banks for direct short-term borrowing from the Fed's discount window.
IntermediateDovish
A monetary policy stance favouring lower interest rates and easier financial conditions to support growth and employment — the opposite of hawkish.
IntermediateFOMC
The Federal Open Market Committee — the Fed body that sets U.S. monetary policy, meeting eight times per year to vote on the federal funds rate target.
IntermediateHawkish
A monetary policy stance favouring higher interest rates and tighter financial conditions to combat inflation — the opposite of dovish.
IntermediateInverted Yield Curve
When short-term Treasury yields exceed long-term yields — historically the most reliable leading indicator of U.S. recession.
IntermediateIORB
The rate the Fed pays banks on reserves held at the Fed — its primary administered tool for steering the fed funds rate within target.
AdvancedQuantitative Easing
A Fed policy of purchasing Treasury bonds and MBS to inject liquidity, lower long-term yields, and stimulate the economy when short rates are near zero.
IntermediateReal Interest Rate
The nominal interest rate minus expected inflation — the true, inflation-adjusted return on lending or cost of borrowing.
IntermediateRepo
A repurchase agreement — a short-term (often overnight) collateralized loan where securities are sold and agreed to be repurchased, serving as the plumbing of money markets.
AdvancedReverse Repo
The Fed's tool for absorbing excess reserves from money markets — the counterparty sells Treasuries to the Fed overnight, draining liquidity from the system.
AdvancedSOFR
Secured Overnight Financing Rate — the benchmark short-term interest rate based on actual overnight Treasury repo transactions, replacing LIBOR.
AdvancedT-Bill
Short-term U.S. Treasury debt maturing in 4, 8, 13, 26, or 52 weeks, sold at a discount to face value rather than paying coupon interest.
Beginner