The Federal Funds Rate and the Secured Overnight Financing Rate (SOFR) are both overnight interest rate benchmarks, but they measure different markets. The Federal Funds Rate is what banks charge each other for unsecured overnight loans of reserves, and the Federal Reserve actively targets it to steer the economy. SOFR is what borrowers pay to raise overnight cash against U.S. Treasury collateral, and the Fed observes it rather than setting it. As of March 2026, the Effective Federal Funds Rate sits at 3.64% and SOFR at 3.62%, a narrow gap that reflects the small premium lenders demand when no collateral is involved.1Federal Reserve Bank of New York. Effective Federal Funds Rate2Federal Reserve Bank of New York. Secured Overnight Financing Rate Data
What the Federal Funds Rate Measures
The Federal Funds Rate is the interest rate banks charge each other for overnight loans of reserve balances held at the Federal Reserve. These loans carry no collateral. The lending bank relies entirely on the creditworthiness of the borrowing bank, so the rate embeds a sliver of bank credit risk.
The Federal Open Market Committee sets a target range for this rate as its primary tool for monetary policy. The current range is 3.50% to 3.75%. The actual daily rate that emerges from trading is the Effective Federal Funds Rate (EFFR), calculated as a volume-weighted median of overnight federal funds trades.3Federal Reserve Bank of New York. Technical Note Concerning the Methodology for Calculating the Effective Federal Funds Rate
The Fed keeps the EFFR inside the target range using administered rates. The most important is Interest on Reserve Balances (IORB), currently 3.65%, which is what the Fed pays banks on reserves parked at the Fed overnight. Because banks can earn 3.65% risk-free from the Fed, they won’t lend reserves to another bank for less, which anchors the EFFR near IORB.4Federal Reserve Board. Interest on Reserve Balances Frequently Asked Questions The EFFR consistently trades just below IORB because the largest lenders in the federal funds market are government-sponsored enterprises like the Federal Home Loan Banks, which can’t earn IORB directly and so accept slightly lower rates.1Federal Reserve Bank of New York. Effective Federal Funds Rate
What SOFR Measures
SOFR is the cost of borrowing cash overnight when the borrower pledges U.S. Treasury securities as collateral. In a repurchase agreement, a dealer sells Treasuries to a lender and agrees to buy them back the next day at a slightly higher price. The difference is effectively the interest rate. Because the lender holds Treasuries throughout, the credit risk is negligible. If the borrower defaults, the lender keeps the collateral.
The Federal Reserve Bank of New York publishes SOFR each business day at approximately 8:00 a.m. Eastern, calculated as a volume-weighted median of eligible overnight Treasury repo transactions across three market segments: tri-party repo data from the Bank of New York Mellon, general collateral finance repo transactions, and bilateral Treasury repo transactions cleared through FICC’s delivery-versus-payment service.2Federal Reserve Bank of New York. Secured Overnight Financing Rate Data
Daily transaction volume behind SOFR regularly exceeds $3 trillion. In mid-March 2026, it was roughly $3.1 trillion.2Federal Reserve Bank of New York. Secured Overnight Financing Rate Data That depth makes SOFR difficult to manipulate and broadly representative of actual funding costs.
SOFR itself is strictly an overnight rate. When a loan needs a rate that lasts a month or longer, lenders reference either CME’s forward-looking Term SOFR (published in 1-month, 3-month, 6-month, and 12-month tenors) or a backward-looking compounded average of daily SOFR.5CME Group. CME Term SOFR Rates Term SOFR gives you the rate at the start of the interest period; compounded SOFR is only fully known at the end.
The Key Differences
Collateral and Credit Risk
Every SOFR transaction is backed by U.S. Treasury securities. No federal funds transaction has any collateral. That single difference explains most of the others. SOFR is a near-risk-free rate; the EFFR includes bank credit risk. Under normal conditions, SOFR trades a few basis points below the EFFR. Federal Reserve research found compounded SOFR averages have historically run about 2 to 3 basis points below compounded EFFR averages.6The Federal Reserve. Historical Proxies for the Secured Overnight Financing Rate
During financial stress, the gap can widen sharply. Banks become reluctant to lend without collateral, pushing the unsecured rate higher while SOFR, anchored to Treasuries, stays comparatively stable. The 2008 crisis showed this vividly: unsecured interbank rates spiked while secured lending remained far cheaper.
Market Size
The federal funds market handles roughly $100 billion in daily volume.7Federal Reserve Bank of St. Louis. Effective Federal Funds Volume The repo market behind SOFR processes over $3 trillion daily, about 30 times more.2Federal Reserve Bank of New York. Secured Overnight Financing Rate Data A benchmark built on 30 times the transaction data is harder to distort and more reflective of broad market conditions.
Role in Monetary Policy
The Fed actively manages the EFFR through its corridor of administered rates. SOFR floats on the supply and demand for Treasury collateral, and the Fed observes it rather than targeting it. When you read that “the Fed raised rates,” that refers to the federal funds target range, not SOFR. SOFR moves in the same direction because reserve levels and collateral availability affect both markets, but the transmission is indirect.
When SOFR Spikes
SOFR’s biggest weakness is its sensitivity to collateral supply and demand imbalances. The most dramatic example came in September 2019, when SOFR jumped from about 2.2% to over 5% in a single day. The Office of Financial Research traced the disruption to a convergence on September 16: a large Treasury settlement date collided with the corporate tax payment deadline, draining reserves from the banking system from two directions at once.8Office of Financial Research. OFR Identifies Factors That May Have Contributed to the 2019 Spike in Repo Rates The New York Fed had to inject billions in emergency repo operations to calm the market.
Quarter-end and year-end dates create smaller, predictable bumps in SOFR as banks scale back repo lending to clean up their balance sheets for regulatory reporting. The effect is modest, but it means SOFR can behave erratically on specific calendar dates in ways the EFFR does not.
In 2021, the Fed launched the Standing Repo Facility, which lets eligible counterparties convert Treasuries into cash overnight at a rate set by the FOMC. If repo rates spike above the facility rate, counterparties tap it and push rates back down.9Federal Reserve Board. Standing Repurchase Agreement Operations Whether it would fully prevent another September 2019 remains untested at that scale.
Which One Affects Your Loans
If you carry variable-rate debt, one of these two benchmarks is behind your interest rate.
The Federal Funds Rate drives products priced off the prime rate. Credit cards, home equity lines of credit, and many small business loans are quoted as “prime plus a margin.” The prime rate tracks the federal funds target with a conventional markup of roughly 3 percentage points; with a target range of 3.50–3.75%, the prime rate in March 2026 is 6.75%.10Federal Reserve Board. H.15 – Selected Interest Rates (Daily) When the Fed cut rates three times in late 2025, prime dropped from 8.50% to 6.75%. Card issuers have been slow to pass through the full benefit of those cuts, though the reductions eventually reach variable-rate consumer balances.
SOFR has become the standard index for adjustable-rate mortgages. Freddie Mac requires that SOFR-indexed ARMs use the 30-day compounded SOFR average as their index, with a margin between 1 and 3 percentage points added on top.11Freddie Mac Single-Family. SOFR-Indexed ARMs Private student loan lenders also commonly reference SOFR when setting variable rates. If you’re shopping for an ARM or a variable-rate private student loan, SOFR is the number that determines your payment when the rate resets.
The practical difference between a prime-linked loan and a SOFR-linked loan is subtle. SOFR is slightly lower as a base index, but lenders adjust the margin to compensate. The bigger point for most borrowers is knowing which index applies to your loan and watching the right benchmark when anticipating changes. Both ultimately move in response to Fed policy, but SOFR can show brief volatility around quarter-end dates that doesn’t reach the prime rate.
Why SOFR Exists
SOFR’s prominence traces back to the LIBOR scandal. The London Interbank Offered Rate underpinned an estimated $300 trillion in financial contracts, but it was based on banks’ self-reported estimates of their borrowing costs, not actual transactions. During the 2008 crisis, the unsecured interbank lending LIBOR was supposed to measure largely evaporated, yet the published rate continued to suggest active borrowing. Investigations later revealed traders at multiple global banks had deliberately manipulated LIBOR submissions.
The Alternative Reference Rates Committee, convened by the Federal Reserve Board and the New York Fed, unanimously selected SOFR as the preferred replacement for U.S. dollar LIBOR in 2017.12Federal Reserve Bank of New York. Alternative Reference Rates Committee – Transition from LIBOR SOFR is transaction-based, drawn from a deep and liquid market, and calculated using transparent methodology published by the New York Fed.13Federal Reserve Bank of New York. How SOFR Works U.S. dollar LIBOR panels ended in June 2023, and SOFR is now the dominant benchmark for products that once referenced LIBOR.
SOFR did not replace the Federal Funds Rate and was never intended to. The two rates coexist and serve different purposes. The Fed still targets the federal funds rate as its monetary policy tool. SOFR is the market benchmark of choice when contracts need a rate rooted in observable transactions rather than in bank estimates.