The economy and the market
Federal funds rate
Definition
The rate banks charge each other for overnight loans of reserves. The FOMC sets a target range for it, usually moving in steps of 0.25 percentage point.
Example
Say the target range is 3.50% to 3.75% and the FOMC cuts by one step: the new range is 3.25% to 3.50%. Banks typically move their prime rate by the same 0.25 point, so the yearly interest on a $40,000 credit line tied to prime falls by $100. A half-point cut would be two steps at once, taking the range to 3.00% to 3.25%.
Hypothetical numbers, for illustration only.
Also defined in
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