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Although consumers do not borrow at the federal funds rate directly, it serves as an important benchmark that influences interest rates across the economy, affecting loans, savings products, and investment markets. Changes to the rate can impact how much you pay on a credit card, what banks offer on savings accounts, and even how investors view stocks and bonds. Understanding how the federal funds rate works can help you make more informed decisions about borrowing, saving, and investing.
Key Points
• The federal funds rate is the interest rate that banks and credit unions charge one another for overnight loans.
• The Federal Reserve establishes a target range for this rate to help manage inflation and support economic growth.
• This rate serves as a key benchmark that influences many other interest rates, including those for consumer loans and savings products.
• When the Federal Reserve adjusts the federal funds rate, borrowing often becomes more or less expensive depending on whether rates rise or fall.
• While the Fed interest rate doesn’t directly set consumer interest rates, changes can indirectly influence markets and financial decisions.
What Is the Federal Funds Rate?
By definition, the federal funds rate is the interest rate banks and credit unions charge one another for overnight loans. Financial institutions are required by law to keep a certain amount of reserves on hand, and some institutions borrow from others to meet those requirements. The interest rate the lending bank can charge is the federal funds rate.
Rather than setting one specific number, however, the Federal Reserve (aka “the Fed”) establishes a target range for the federal funds rate. Banks negotiate a specific rate between each other within that range set by the Federal Reserve. The federal funds rate serves as a benchmark for many other interest rates across the economy. When the Fed raises rates, borrowing generally becomes more expensive. When the Fed lowers rates, borrowing costs tend to fall. Changes to the federal funds rate can also influence the interest rates consumers earn on savings accounts, certificates of deposit, and other bank accounts.
Federal Funds Rate vs. Federal Interest Rate: What’s the Difference?
The terms “federal funds rate” and “Fed interest rate” generally refer to the same thing – the interest rate that U.S. banks pay one another to borrow or loan money overnight. In everyday conversations and financial news, “the Fed raised interest rates” usually means the Federal Reserve adjusted the federal funds rate target range. While the Fed does not directly set the interest rates consumers see on loans or savings, their control of this benchmark rate triggers a ripple effect across the entire U.S. financial system.
How Is the Federal Funds Rate Set?
The Federal Reserve uses monetary policy to promote stable prices and maximum employment. To accomplish those goals, it regularly evaluates economic conditions and adjusts the federal funds rate when necessary. Factors that influence rate decisions include:
• Inflation indicators
• Labor market data
• Economic growth
• Consumer spending
• International economic developments
The Fed may raise rates to slow inflation or lower rates to stimulate economic activity.
The Role of the Federal Open Market Committee (FOMC)
The Federal Open Market Committee (FOMC) is a 12-member group responsible for setting the federal funds rate target range. The committee consists of the seven members of the Federal Reserve Board of Governors and five of the 12 regional Federal Reserve Bank presidents. The FOMC typically meets eight times each year and makes a decision about the federal funds rates using forecasts provided by each member. Following each meeting, it releases a statement explaining its decision along with its outlook for the economy. At its meeting in June 2026, the FOMC maintained the federal funds rate target range at 3.50% to 3.75%. Because rate decisions can change throughout the year, it’s important to check the latest announcements from the Federal Reserve.
How Does the Fed Influence the Economy?
The Federal Reserve uses interest rates as a tool to help balance inflation and economic growth. When inflation is high, the Fed may raise rates to discourage borrowing and spending. Higher borrowing costs can slow demand and help ease price increases. When economic growth weakens, the Fed may lower rates to encourage consumers and businesses to borrow, spend, and invest. The Fed’s actions often affect:
• Consumer spending
• Business investment
• Employment
• Inflation
• Housing activity
• Financial markets
Because these effects take time to work through the economy, the impact of rate changes may not be immediately noticeable.
Recommended: How to Beat Inflation
How Does the Federal Funds Rate Affect Interest Rates?
Although banks and lenders determine their own rates, many financial products move in the same direction as the federal funds rate.
The Prime Rate
The prime rate is the benchmark interest rate commercial banks charge their most creditworthy corporate customers. The prime rate is based on the federal funds rate, often set as the fed funds rate plus 3%. That prime rate is generally the starting point for other interest rates — including mortgages and credit cards — which are typically set at the prime rate plus an additional percentage. When the Fed adjusts rates, banks often change the prime rate shortly afterward.
Credit Cards and Auto Loans
When the Federal Reserve adjusts the federal funds rate, it changes the base cost for banks to borrow money. Lenders typically pass these increased or decreased costs onto consumers, in the form of higher or lower interest rates.
Credit cards are especially sensitive to changes in the federal funds rate because many cards have variable annual percentage rates (APRs) tied to the prime rate. When the Fed raises rates, credit card APRs often increase and monthly interest charges may rise.
Auto loan rates also tend to follow movements in the Federal funds rate. When the Fed raises rates, borrowing costs for new cars typically rise; when the Fed lowers rates, car loans often become cheaper. Because most auto loans have fixed rates, a Fed rate change won’t impact your existing loan’s interest rate or monthly payment.
Mortgages and Housing Costs
Mortgage rates are influenced by several factors, including Treasury yields, inflation expectations, and broader economic conditions. They do not move in lockstep with the federal funds rate, but Fed policy can still affect housing costs.
Higher Fed interest rates generally lead to higher rates on mortgages and, in turn, more expensive monthly housing payments. This can make home buying less affordable and slow housing demand. Conversely, lower federal fund rates can lead to lower mortgage rates, improve affordability, and encourage home buying or refinancing.
Savings Accounts and Certificates of Deposit
When the Fed increases rates, banks often raise annual percentage yields (APYs) on high-yield savings accounts, money market accounts, and new certificates of deposit (CDs). However, banks are not required to pass along rate increases immediately, and rates can vary widely among financial institutions.
During periods of falling rates, yields on savings accounts and new CDs typically decline. If you already hold a CD, however, your rate remains locked in for the entire term, which protects you from future Fed rate cuts. As a result, savers often try to lock in high yields before anticipated rate drops.
Recommended: APY Interest Calculator
How Does the Federal Funds Rate Affect the Stock Market?
While the federal funds rate has no direct impact on the stock market, it can have the same kind of indirect, ripple effect that is felt in other areas of the U.S. financial system.
Generally, the federal funds rate has an inverse relationship with the stock market. For example, a rate cut can prompt a rise in stock prices by making financing cheaper and more accessible. An increase in the Federal interest rate, on the other hand, can push stock prices lower, since it suggests that companies may soon pay more for capital.
Due to this close relationship, stock analysts often pay close attention to statements by members of the FOMC to gain insight into where the federal funds rate may be going. Once the Fed adjusts rates, the stock market often reacts swiftly, as investors reconsider corporate prospects for earnings and future growth.
What Other Factors Affect Consumer Interest Rates?
The federal funds rate is only one factor banks and lenders consider when setting rates. Consumer interest rates can also be impacted by:
• Credit profile: Your credit score, debt-to-income ratio, and income stability determine your individual risk level. Higher risk generally results in higher interest rates, regardless of rates set by the Federal Reserve.
• Loan specifics: Secured loans with collateral typically feature lower rates than unsecured options. Shorter loan durations and larger down payments can also reduce your rate.
• Treasury yields: Longer-term rates, such as mortgage rates, are influenced by long-term bond yields, especially the 10-year Treasury yield. When investors expect slower economic growth, bond yields may fall, and mortgage rates often follow.
• Inflation expectations: Lenders may demand higher rates when inflation is high to protect the future purchasing power of the money that borrowers pay back.
• Bank and lender economics: Banks must cover their own cost of acquiring funds, operational overhead, and profit margins, which they bake directly into loan rates as well as yields on savings.
The Takeaway
The federal funds rate is a key tool the Federal Reserve uses to manage inflation and support economic growth. Although consumers do not borrow at this rate directly, it influences many aspects of everyday finances, including credit card APRs, auto loans, mortgages, savings account yields, and stock market performance.
By understanding how the federal fund rates works and how changes affect borrowing and savings costs, you can better evaluate financial decisions and prepare for changing economic conditions.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What is the fed rate right now?
As of June 2026, the Federal Reserve’s target range for the federal funds rate is 3.50% to 3.75%. The Federal Open Market Committee (FOMC) maintained that range at its June 17, 2026 meeting. The Fed reviews interest rates eight times a year and may raise, lower, or leave them unchanged depending on the inflation, employment, and broader economic conditions. Because rates can change over time, it’s a good idea to check the latest announcements from the Federal Reserve for the most current information.
How does the federal interest rate affect everyday inflation?
The federal funds rate helps the Federal Reserve manage inflation by influencing borrowing and spending. Higher rates generally make loans and credit more expensive, which can reduce consumer demand and help slow price increases. Lower rates can encourage spending and investment, which may support economic growth but can also contribute to inflation if demand rises faster than supply. Changes in the federal funds rate affect inflation gradually rather than immediately.
What happens to my money when the Fed lowers interest rates?
Lower interest rates can reduce the yields banks pay on savings accounts, money market accounts, and certificates of deposit. Borrowing may become less expensive, which can lower interest costs on some loans and encourage spending and investing. Existing fixed-rate loans and savings products generally keep the same rates, while variable-rate products and new accounts may reflect lower rates over time.
How often does the Federal Reserve change interest rates?
The Federal Open Market Committee (FOMC) meets eight times each year to review economic conditions and determine whether changes to the federal funds rate are appropriate. The Fed does not change rates at every meeting, and it may hold rates steady for months or adjust them multiple times in a year depending on inflation, employment, and broader economic conditions.
Does the federal funds rate directly set my mortgage rate?
No. Mortgage rates are influenced primarily by Treasury yields, inflation expectations, and conditions in the bond market. However, the federal funds rate can affect those factors and generally influence mortgage rates. As a result, mortgage rates often move in the same general direction as Fed policy over time, but they do not rise or fall in lockstep with changes to the federal funds rate.
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Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet
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See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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