The federal funds rate, also known as Federal Funds Rates in English, mainly includes the Federal Funds Effective Rate and the Federal Funds Target Rate. The Federal Funds Target Rate is an interest rate set by the Federal Open Committee (FOMC). In the operation of the Federal Reserve (Federal Reserve), it serves as a guide for the interest rates charged when banks lend to each other and plays the most direct regulatory role. The "Federal Funds Target Rate" or "Federal Reserve Rate Cut" that people hear in daily life refers to the increase or decrease in the Federal Funds Target Rate. The federal funds target rate first stipulates the interest rate for overnight borrowing between banks, because the Federal Reserve Act stipulates that all banks must ensure that there is enough cash in the bank before the end of the day to ensure that they can respond to customers' withdrawal requests on the next day. When banks have insufficient reserves at the end of the day, they need to borrow money from other banks. The interest rate for borrowing is called the overnight interest rate (Overnight Interest Rate), which is also a type of Interbank Offered Rate (IBOR). In addition, the Federal Funds Effective Rate is a weighted average of the interest rates charged by the Federal Reserve when lending to other banks across the country, and is based on the Federal Funds Target Rate. The effective federal funds rate from 1955 to 2022 is as follows: As of May 2, 2022, the effective federal funds rate in the United States is 0.33. Data source: New York Fed How is the federal funds rate set? The federal funds target rate (Target Rate) is set by the Federal Open Committee (FOMC), which usually holds formal meetings every seven weeks for a total of eight times a year. If necessary, additional meetings can be held to adjust the federal funds target rate. The federal funds effective rate (Effective Rate) is determined by the effective midpoint rate for overnight trading on the previous business day and is published daily by the Federal Reserve Bank of New York. When setting the federal funds target interest rate, the Federal Reserve mainly decides to raise or lower interest rates based on the prevailing economic conditions. The Federal Reserve mainly considers the employment rate and inflation at the time to set the corresponding federal funds target interest rate. If the economy slows, the FOMC may lower interest rates to make it cheaper for businesses to borrow, invest and create jobs, while stimulating the economy by allowing consumers to borrow or spend more. If the economy grows too fast and inflation becomes severe, the Fed may raise interest rates to reduce spending and borrowing to control inflation. Effective interest rate on date (%) Target interest rate (%) 05/09/2022 0.83 0.75～1 05/06/2022 05/05/2022 05/04/2022 0.33 0.25～0.5 05/03/2022 05/02/2022 04/29/2022 04/28/2022 04/27/2022 04/26/2022 04/25/2022 04/22/2022 04/21/2022 04/20/2022 04/19/2022 04/18/2022 04/15/2022 04/14/2022 04/13/2022 04/12/2022 04/11/2022 04/08/2022 04/07/2022 04/06/2022 04/05/2022 Source: New York Fed How does the federal funds rate regulate economic activity?
An increase or decrease in the federal funds rate can have profound effects on economic activity: When the federal funds rate decreases, that is, when the interest rate when other banks borrow funds from the federal savings system decreases, the interest rates when companies or individuals borrow money from banks will decrease, including credit card swipe interest rates, loan interest rates, etc. At this time, people can borrow money from banks at lower interest rates for consumption, and the increase in consumption will increase The rising market demand for goods requires manufacturers or service providers to increase their total amount to meet market demand. At the same time, due to the decline in bank lending rates, manufacturers expand production scale, such as building additional factories, and the cost of adding employees also decreases. This stimulates consumption, increases employment, and accelerates the growth of the entire economic environment. On the contrary, if there is excessive inflation in the market, the Federal Reserve will raise the federal funds rate, which will increase the cost of interbank borrowing, which will in turn cause the cost of borrowing to increase for the public, which will subsequently reduce consumption to control prices. What impact will the Fed's interest rate cuts have on the economy? The Fed's interest rate cut means lower loan interest rates. Individuals can borrow money to purchase properties or vehicles at more affordable borrowing rates, and companies can also obtain more low-interest loans to increase investment; After the Federal Reserve cuts interest rates, the savings interest available on savings accounts will decrease; Rate cuts by the Fed typically boost the stock market because investors can borrow and invest at lower interest rates; The stimulation of consumption caused by the Federal Reserve's interest rate cuts can boost the production and service industries while increasing employment.