Federal funds rate.
In plain English
The federal funds rate is the interest rate banks charge each other for overnight loans of their reserves at the Federal Reserve. The Fed targets this rate by buying and selling Treasuries to add or drain reserves from the banking system. Changes ripple through every other interest rate readers see: mortgages, car loans, credit cards, savings accounts, and bond yields all move in response. When you hear 'the Fed raised rates,' this is the rate that moved.
01Why it matters
The federal funds rate is the single most-watched number in U.S. macro policy. When it goes up, borrowing gets more expensive across the economy and the Fed is trying to slow inflation. When it goes down, borrowing gets cheaper and the Fed is trying to boost activity. Mortgages, savings rates, and corporate bond yields all track this rate, even if imperfectly.
02The math, step by step
From March 2022 to July 2023, the Fed raised the federal funds rate target from near 0% to 5.25% to 5.50% in an effort to slow inflation. During that span, the average 30-year mortgage rate rose from about 3.8% to over 7%, and HYSA rates rose from near zero to 4% or 5%.
03What this is NOT
The prime rate is what banks charge their best corporate customers and is typically the federal funds rate plus 3%. They move together but they are not the same number.
04Receipts
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