# What Is the Federal Funds Rate? Target Range, Effective Rate and How It Works

Web page: https://uptickflow.com/en/learn/federal-funds-rate  
Updated: 2026-11-13

What the federal funds rate is: who sets the target range, how it differs from the effective rate (EFFR), how the Fed steers it and how it reaches loans and stocks.

The federal funds rate is the interest rate at which banks and other depository institutions lend reserve balances to each other overnight. The Federal Open Market Committee (FOMC) does not fix it by decree: it sets a target range, and the Federal Reserve uses a few rates it controls directly to keep actual trading inside that range. As of November 2026, the target range is 3.75% to 4.00%.

Below: what the rate is, who sets the target range and how often, how the target differs from the effective federal funds rate (EFFR), how the Fed steers it, how it passes through to the prime rate, loans, bond yields and stock valuations, and where to see what markets expect. Why rate decisions move share prices is covered in [the Federal Reserve and stocks](https://uptickflow.com/en/learn/federal-reserve-and-stocks). This is education, not investment advice, and nothing here forecasts the Fed’s next move.

## What is the federal funds rate?

Banks keep deposits, called reserve balances, in accounts at the Federal Reserve. A bank with more than it needs can lend the excess overnight to an institution that wants more; the loan is unsecured and is repaid the next business day. The interest rate on those loans is the federal funds rate. The New York Fed describes the market as overnight dollar borrowing by depository institutions from other depository institutions and certain other entities, mainly government-sponsored enterprises.

It is the Federal Reserve’s main policy rate. In the Fed’s own description, changes in the federal funds rate set off a chain of events that affects other short-term interest rates, exchange rates, long-term interest rates and the amount of money and credit, and in the end employment, output and prices. That is why investors follow so closely a rate that almost nobody outside the banking system ever borrows at.

- **Federal funds rate**: The interest rate at which depository institutions lend reserve balances to each other overnight, without collateral. The FOMC sets a target range for it, and it is the Federal Reserve’s main policy rate.
- **Reserve balances**: Deposits that banks and other depository institutions hold in their accounts at the Federal Reserve. They are what is lent and borrowed in the federal funds market.

## Who sets the federal funds rate, and how often does it change?

The target is set by the FOMC, which has twelve voting members: the seven governors of the Federal Reserve Board, the president of the Federal Reserve Bank of New York and four of the other eleven Reserve Bank presidents, who rotate yearly. It holds eight regularly scheduled meetings a year and announces its decision in a statement after each one. The times of those announcements are in the [economic calendar](https://uptickflow.com/en/learn/economic-calendar) guide.

Since late 2008 the target has been a range a quarter of a percentage point wide instead of a single number, and most changes are made in quarter-point steps (25 basis points). A meeting can end with a raise, a cut or no change, and the range often stays put for months. The Fed’s own table of changes shows the recent path: the range reached 5.25%–5.50% in July 2023, was lowered six times between September 2024 and December 2025 to 3.50%–3.75%, and was raised by a quarter point in September 2026 to 3.75%–4.00%.

At its meeting of October 27–28, 2026, the committee kept the range at 3.75%–4.00%, which is where it stands as of November 2026. The next scheduled meeting is December 8–9, 2026. Whether the Fed sounds inclined to raise or to cut has its own vocabulary, explained in [hawkish vs dovish](https://uptickflow.com/en/learn/hawkish-vs-dovish).

- **Target range**: The band, a quarter of a percentage point wide, in which the FOMC wants the federal funds rate to trade, such as 3.75% to 4.00%. A rate hike or a rate cut is a change in this range.
- **Federal Open Market Committee (FOMC)**: The Federal Reserve committee that sets US monetary policy. Its twelve voting members hold eight scheduled meetings a year and decide the target range for the federal funds rate.

## Target range vs effective federal funds rate (EFFR): what is the difference?

The target range is a goal; the effective federal funds rate is what actually happened. Each morning at about 9:00 a.m., the New York Fed publishes the EFFR for the previous business day: the volume-weighted median of the overnight federal funds transactions that institutions report to it.

On November 10, 2026, for example, the EFFR was 3.88% on about $98 billion of transactions, inside the 3.75%–4.00% range, as the drawing at the top of the page shows. When a headline says the Fed moved rates to 4%, it is quoting the top of the target range; data tables such as the Fed’s H.15 release list the effective rate. The two move together because the tools described in the next section are built to keep the effective rate within the range.

- **Effective federal funds rate (EFFR)**: The volume-weighted median rate of overnight federal funds transactions, calculated and published by the Federal Reserve Bank of New York each business day for the day before. It shows where the market actually traded relative to the FOMC’s target range.

## How does the Fed keep the federal funds rate inside the range?

The Fed does not order banks to lend at a given rate. It sets a few rates of its own, often called administered rates, that make it unattractive to lend below the range or to borrow above it. After each meeting an implementation note lists them; the settings below took effect on October 29, 2026.

Before the 2008 financial crisis the method was different: the Fed bought and sold securities in open market operations to adjust the supply of reserve balances until the rate traded around the target. Today the committee keeps reserves ample, and the rates below do most of the work. On November 10, 2026, the effective rate was 3.88%, 2 basis points under the interest paid on reserves.

- Interest on reserve balances (IORB), 3.90%: the rate the Fed pays banks on the reserves they hold with it, set by the Board of Governors. A bank that can earn 3.90% at the Fed has little reason to lend to another bank for less.
- Overnight reverse repurchase agreements (ON RRP), 3.75%: the Fed sells a security to an eligible counterparty and buys it back the next day, which amounts to paying that counterparty interest overnight. Institutions that can use the facility should be unwilling to lend elsewhere for less, so the rate works as a floor.
- The discount rate, 4.00%: the rate on primary credit, the Fed’s main lending program for banks, set at the top of the range. Together with the Fed’s standing repo operations, also at 4.00%, it limits how far overnight rates can rise.

- **Interest on reserve balances (IORB)**: The interest rate the Federal Reserve pays on balances that banks hold in their accounts at the Fed. It is set by the Board of Governors and is a main tool for keeping the federal funds rate in its target range.
- **Overnight reverse repo facility (ON RRP)**: An operation in which the Fed sells a security to an eligible counterparty and buys it back the next day at a set rate. That offering rate helps put a floor under overnight interest rates.
- **Discount rate (Federal Reserve)**: The interest rate the Federal Reserve charges banks that borrow from it through the discount window; the main program is called primary credit. It is set at the top of the target range for the federal funds rate.

## How does the federal funds rate affect the prime rate, loans, bond yields and stocks?

The first link is the prime rate, a reference rate that banks set themselves and use to price many loans, including credit card balances and loans to small businesses. The Federal Reserve has no direct role in setting it, but many banks base it partly on the federal funds target. On November 10, 2026, the Fed’s H.15 release showed the prime rate posted by most of the largest banks at 7.00%, exactly 3.00 percentage points above the top of the target range.

Further out, the link loosens. The shortest Treasury bills trade near the policy rate, while longer yields depend more and more on where investors expect the rate to go over the life of the bond, along with inflation and risk. The drawing below lines up one day’s rates from the same release: the effective federal funds rate at 3.88%, the 3-month Treasury at 4.30%, the 2-year at 4.73%, the 10-year at 4.98% and the prime rate at 7.00%. [Bond yields and stocks](https://uptickflow.com/en/learn/bond-yields-and-stocks) explains why the 10-year yield is not set by the Fed.

Stocks sit at the end of the chain. A higher policy rate tends to raise the discount rate investors apply to future profits, raise companies’ borrowing costs and make cash and bonds more competitive; a lower one does the reverse. [The Federal Reserve and stocks](https://uptickflow.com/en/learn/federal-reserve-and-stocks) works through those channels, and [what moves stock prices](https://uptickflow.com/en/learn/what-moves-stock-prices) sets them next to earnings. These are tendencies, not rules: stocks can rise while rates rise if earnings grow fast enough.

- **Prime rate**: A reference interest rate that each bank sets for itself and uses to price many loans, such as credit cards and small-business loans. Banks tend to base it partly on the federal funds target; the Fed’s H.15 release reports the rate posted by most of the largest banks.

## Where can you see what the market expects the Fed to do?

In federal funds futures. Each contract covers one calendar month and settles at 100 minus the average effective federal funds rate for that month, so its price is a running estimate of where the rate will be. A price of 96.10 implies an average rate of 100 − 96.10 = 3.90%.

The hypothetical drawing below turns that into odds. If the effective rate is 4.00% today and next month’s contract implies 3.90%, the market is pricing 0.10 point of easing. One quarter-point cut is 0.25, so the priced odds of a cut are 0.10 ÷ 0.25 = 40%. The shortcut assumes the whole month falls after the meeting; published tools do the same arithmetic meeting by meeting. Widely quoted ones include the CME FedWatch tool, built on federal funds futures, and the Atlanta Fed’s Market Probability Tracker, which estimates market-implied probabilities for ranges of the average federal funds rate.

Read them as prices, not forecasts. New York Fed economists point out that rates implied by futures also contain a risk premium, so they are not pure expectations, and the odds can change sharply after a single inflation or jobs report. The FOMC’s own projections, the dot plot, are a second reference; see [the Federal Reserve and stocks](https://uptickflow.com/en/learn/federal-reserve-and-stocks).

- **Federal funds futures**: Exchange-traded contracts that settle at 100 minus the average effective federal funds rate for a given month. Their prices show the path of the policy rate that markets are pricing, including a risk premium.

## What does a change in the federal funds rate mean for traders?

A change in the range matters less than how it compares with what was already priced, and less than what the Fed signals about its next steps. Habits many traders and investors use:

- Know the date and time of each FOMC decision; the [economic calendar](https://uptickflow.com/en/learn/economic-calendar) guide lists them.
- Before the meeting, check what futures are pricing, so you can tell an expected decision from a surprise.
- Read the statement and the projections for the path ahead, not only the new range; [hawkish vs dovish](https://uptickflow.com/en/learn/hawkish-vs-dovish) explains how markets label the tone.
- Watch Treasury yields and the dollar for the first reaction; see [bond yields and stocks](https://uptickflow.com/en/learn/bond-yields-and-stocks) and [the US dollar and stocks](https://uptickflow.com/en/learn/us-dollar-and-stocks).
- Follow the inflation data the Fed responds to, starting with the [Consumer Price Index](https://uptickflow.com/en/learn/consumer-price-index).
- Keep position size modest around the announcement, when spreads widen and prices jump; see [risk management](https://uptickflow.com/en/learn/risk-management).

## Key takeaways

- The federal funds rate is the overnight rate at which banks lend reserve balances to each other; the FOMC sets a quarter-point target range for it at eight scheduled meetings a year.
- As of November 2026 the target range is 3.75%–4.00%; the effective rate (EFFR), published daily by the New York Fed, was 3.88% on November 10, 2026.
- The Fed steers the rate with rates it sets itself: interest on reserve balances, the overnight reverse repo rate and the discount rate.
- It reaches the prime rate and short-term borrowing first; longer bond yields and stock valuations depend more on the expected path.
- Federal funds futures show what markets are pricing: 100 minus the price is the implied average rate.

## FAQ

**What is the current federal funds rate?**

As of November 2026, the FOMC’s target range is 3.75% to 4.00%. It was raised by a quarter point in September 2026 and left unchanged at the meeting of October 27–28, 2026. The effective rate was 3.88% on November 10, 2026. The range can change at any meeting, so check the Federal Reserve’s website for the latest.

**Who sets the federal funds rate?**

The Federal Open Market Committee sets the target range. Its twelve voting members are the seven Fed governors, the president of the New York Fed and four other Reserve Bank presidents on a yearly rotation. The rate on each actual loan is agreed between the two institutions involved.

**Is the federal funds rate the same as the prime rate?**

No. The federal funds rate is what banks charge each other overnight; the prime rate is a reference rate banks set for loans to customers. In November 2026 the prime rate reported by the Fed was 7.00%, 3 percentage points above the top of the target range.

**What is the difference between the federal funds rate and the discount rate?**

The federal funds rate is a market rate between banks. The discount rate is what the Federal Reserve itself charges banks that borrow from its discount window. It is set at the top of the target range, 4.00% as of November 2026, so it acts as a ceiling, not as the everyday rate.

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Educational content, not financial advice. Trading involves risk of loss. https://uptickflow.com/llms.txt