Federal Funds Rate

The federal funds rate is the interest rate banks charge each other for overnight loans of reserves. The Federal Open Market Committee steers it into a target range, set at eight scheduled meetings a year. It is not a rate you are offered at a bank. It is the base rate the entire US rate structure is built on.

In the US, the pass-through chain is short. The prime rate (what banks quote their best customers) sits at the fed funds target plus three points. Credit card APRs and HELOCs float off the prime. High-yield savings and CD rates follow with a lag, and money market yields track almost immediately.

Mortgages are the exception: they price off the 10-year Treasury, not the fed funds rate. That is why a Fed cut does not automatically lower the 30-year fixed. The rate is the lever; everything else is the mechanism it moves.

The FOMC (twelve voting members: seven governors, the New York Fed president, and four rotating regional presidents) sets a target range at eight scheduled meetings a year, with room for intermeeting moves in emergencies. The New York Fed desk implements the target using two levers: interest on reserve balances (the rate the Fed pays banks on reserves, the floor) and the overnight reverse repo facility (the rate money funds and others earn, the ceiling). The effective fed funds rate trades inside the range, and the range is the anchor everything else prices from.

The pass-through runs in order. The prime rate moves the day the target moves (target plus three points), so credit cards and HELOCs reprice within a billing cycle. Savings and CD rates follow with a lag of weeks to months, because deposit pricing is a competitive decision, not a formula. Money market fund yields move almost immediately. The 10-year Treasury, which prices mortgages, moves on expectations before the Fed acts, which is why mortgage rates often fall in anticipation of cuts and rise after they are delivered.

The 2022-2023 cycle is the clean demonstration: the range went from 0%-0.25% to 5.25%-5.50% in eighteen months, the fastest since the early 1980s. Cash accounts went from paying nothing to paying 4% to 5%; credit cards went from 16% to over 20%; and the easing cycle that began in September 2024 ran the reverse direction at a slower speed.

The fed funds rate is the lever behind every APY you are quoted and every ARM reset you will sign. When it moves, your HYSA, your CD renewals, your money market fund, your credit card APR, and your HELOC all reprice on the same lever at different speeds. The difference between the fast and slow repricing is real money. A $25,000 HYSA moved from 0.05% to 4.35% during the hikes: roughly $1,075 a year that the slow accounts never collected.

I watched a colleague named Brent (yes, that Brent) complain about the Fed all through the 2022-2023 hikes while his checking account paid 0.01% and his HYSA paid 4.5%. The rate was the same; the accounts were not. The lever moves everything, but only if your money is sitting on the part of the machine that actually moves.

The highest-leverage thing most Americans can do is keep cash in accounts that reprice with the Fed (HYSAs, T-bills, money market funds) and price mortgages off the 10-year Treasury rather than the meeting calendar. Run the numbers with the savings interest calculator and see the ARM side with the mortgage amortization calculator.