Federal Funds Rate
The federal funds rate is the interest rate at which US banks lend reserves to each other overnight, and its target range is set by the Federal Reserve.
Banks hold reserves at the Federal Reserve and lend excess reserves to each other overnight. The FOMC sets a target range for this rate, for example a band 0.25 percentage points wide, and uses tools such as the interest it pays on reserves to keep the market rate inside it.
The fed funds rate is the anchor for short-term interest rates throughout the economy. Changes flow through to the prime rate, credit card and auto loan rates, savings account yields, money market funds and Treasury bill yields. Longer-term rates such as mortgage rates are influenced more indirectly through expectations.
Raising the rate makes borrowing more expensive and is used to slow inflation; cutting it makes credit cheaper and is used to support growth and employment. Stock investors pay attention because lower rates can lift valuations and higher rates can weigh on them.
Example: a 0.50-percentage-point cut, or 50 basis points, typically lowers the prime rate by the same amount within a day.