The Federal Reserve directly controls four interest rates: a target range for the federal funds rate (currently 3.50% to 3.75%), the interest rate it pays banks on reserve balances (3.65%), the rate it offers on overnight reverse repurchase agreements, and the discount rate it charges banks that borrow from it directly (3.75%).1Federal Reserve. Minutes of the Federal Open Market Committee January 27-28, 2026 The Fed does not set your credit card APR, your mortgage rate, or the yield on your savings account, but those four rates pull on nearly every borrowing and saving rate in the country.
The Rates the Fed Sets Directly
The Federal Funds Target Range
The federal funds rate is what banks charge each other for overnight loans of their reserves. The Federal Open Market Committee doesn’t pick a single number for it. The committee sets a target corridor, currently 25 basis points wide, and uses its other tools to keep the actual market rate inside that corridor.2Federal Reserve Board. The Fed Explained – Monetary Policy As of the January 2026 meeting, the range is 3.50% to 3.75%.1Federal Reserve. Minutes of the Federal Open Market Committee January 27-28, 2026 When reporters say “the Fed raised rates,” they mean the FOMC moved this range.
The actual overnight rate at which banks trade, called the Effective Federal Funds Rate, is a volume-weighted median of real transactions published daily by the Federal Reserve Bank of New York.3Federal Reserve Bank of New York. Effective Federal Funds Rate
Interest on Reserve Balances
Every bank keeps a reserve account at the Fed, and the Fed pays interest on the money sitting in those accounts. The Board of Governors sets this rate (IORB), currently 3.65%.4Federal Reserve Board. Interest on Reserve Balances IORB functions as the floor for overnight lending. No bank will lend reserves to another bank below 3.65% when it can earn that rate risk-free from the Fed. When the FOMC adjusts the target range, the Board typically moves IORB by the same amount.5Federal Reserve Board. Interest on Reserve Balances IORB Frequently Asked Questions
The Overnight Reverse Repo Rate
Money market funds, government-sponsored enterprises, and other large non-bank lenders cannot hold reserve accounts at the Fed, so IORB doesn’t anchor their behavior. The overnight reverse repo facility (ON RRP) does. It gives those institutions a place to park cash overnight at a rate set by the FOMC, which keeps them from lending at rates below the target range.6Federal Reserve Bank of New York. Repo and Reverse Repo Agreements IORB and the ON RRP rate together form the floor of the Fed’s rate corridor.
The Discount Rate
The discount window is the Fed’s direct lending facility for banks that need cash in a hurry. The primary credit rate, commonly called the discount rate, is 3.75% as of early 2026, deliberately set at the top of the fed funds target range to encourage banks to borrow from each other first. All loans require collateral — Treasury securities, commercial loans, residential mortgages, or other qualifying assets.7Federal Reserve Board. The Fed – Discount Window Lending A secondary credit program at a higher rate exists for banks in weaker condition. Because any bank can always borrow from the Fed at the posted price, the discount rate acts as the ceiling of the corridor.
How Those Rates Reach What You Pay
The Fed doesn’t set the APR on your credit card or the rate quoted at your dealership. But the four rates above act like gravity on everything you borrow or save. Some channels are nearly mechanical; others work through market expectations.
Credit Cards and HELOCs
Banks price loans to their best customers off a benchmark called the prime rate. The Fed has no formal role in setting it, but most large banks peg their prime rate to the fed funds target, and for decades it has sat about 3 percentage points above the upper bound.8Federal Reserve Board. What Is the Prime Rate, and Does the Federal Reserve Set the Prime Rate With the target range at 3.50% to 3.75%, prime is 6.75%.
Credit cards are the most visible product tied to it. Most carry a variable APR calculated as the prime rate plus a fixed margin, so a 0.25% Fed hike shows up on your statement within one or two billing cycles. Home equity lines of credit work the same way. Cuts flow through just as fast in the other direction.
Auto Loans and Small Business Loans
Most auto loans carry a fixed rate, so an existing loan doesn’t change when the Fed moves. But the rate a lender quotes a new applicant shifts as prime and broader funding costs move. If the Fed has been raising, expect to pay more at the dealership.
Small business borrowers see a direct connection. The SBA’s 7(a) loan program caps variable rates at prime plus a margin that depends on loan size, from prime plus 3.0% on loans above $350,000 to prime plus 6.5% on loans of $50,000 or less.9U.S. Small Business Administration. Terms, Conditions, and Eligibility Every hike tightens the math on an expansion.
Fixed-Rate Mortgages
This is where the Fed’s influence turns indirect. Thirty-year fixed mortgage rates are not linked to the federal funds rate directly. Lenders price them as a spread above the yield on 10-year Treasury notes, with the spread covering origination costs, lender margins, and the extra risk of a mortgage-backed security compared to a Treasury bond.10Fannie Mae. What Determines the Rate on a 30-Year Mortgage
The Fed influences the 10-year yield through expectations. If the FOMC signals rates will stay high for a long time, bond investors demand higher yields on long-term debt, and mortgage rates climb. If the market believes cuts are coming, long-term yields fall and mortgage rates ease, sometimes before any Fed action. That’s why mortgage rates occasionally move opposite to a Fed announcement: the market had already priced the move in.
Adjustable-Rate Mortgages
ARMs respond more directly than fixed mortgages. Most today use the Secured Overnight Financing Rate as their benchmark index.11Freddie Mac Single-Family. SOFR-Indexed ARMs SOFR is based on actual transactions in the Treasury repo market and tracks closely with the federal funds rate. When the Fed raises the target, SOFR follows, and ARM holders see a higher payment at the next adjustment.
Federal Student Loans
Federal student loan rates are set once a year by a formula Congress wrote into the Higher Education Act. The rate equals the high yield from the last 10-year Treasury auction before June 1, plus a statutory add-on that varies by loan type. For the 2025–2026 academic year, that auction yielded 4.342%, which produced a fixed rate of 6.39% for undergraduates, 7.94% for graduate students, and 8.94% for PLUS loans.12Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026 The rate is fixed for the life of the loan, but each new cohort inherits whatever the Treasury market, shaped in part by Fed policy, was doing that spring.
Savings Accounts, CDs, and Money Market Funds
Higher borrowing costs have an upside: higher returns on cash. When the Fed pushed rates above 5% in 2023, high-yield savings and money market yields reached levels many savers hadn’t seen in a decade. As the Fed cut through late 2024 and 2025, those yields dropped in step. Money market fund returns in particular have historically mirrored the federal funds rate with very little lag.
CDs follow the same pattern. The FDIC’s national average for a 12-month CD is 1.55% as of February 2026, though competitive online banks typically pay well above that.13Federal Deposit Insurance Corporation. National Rates and Rate Caps Shopping around matters more in a changing-rate environment. Locking into a 5-year CD at the wrong moment of a cutting cycle feels different from locking in at the peak.
The Balance Sheet, a Second Lever
When short-term rates are already near zero and the economy still needs support, the Fed turns to its balance sheet. By buying large quantities of Treasury bonds and mortgage-backed securities (quantitative easing), the Fed drives bond prices up and long-term yields down.14Board of Governors of the Federal Reserve System. The Central Bank Balance-Sheet Trilemma Lower long-term yields translate into cheaper fixed-rate mortgages, corporate borrowing, and auto loans. The reverse (quantitative tightening) lets bonds roll off without reinvestment, removing demand from the bond market and pushing long-term rates higher. The most recent round of balance-sheet reduction concluded in December 2025.
Why the Fed Moves Rates
Federal law directs the Fed to promote maximum employment, stable prices, and moderate long-term interest rates.15Office of the Law Revision Counsel. 12 U.S. Code 225a – Maintenance of Long Run Growth of Monetary and Credit Aggregates These goals pull against each other. Raising rates to fight inflation slows hiring; cutting rates to boost employment risks reigniting prices. The FOMC weighs data on jobs, consumer prices, wages, and global conditions at each of its eight scheduled meetings per year before deciding whether to adjust the target range, hold, or signal a shift.2Federal Reserve Board. The Fed Explained – Monetary Policy
Knowing that framework helps you read the direction of travel. Hot inflation generally means rates stay elevated or climb, which is bad for borrowers and good for savers. A weakening labor market with cooling prices makes cuts more likely, which is the moment to lock in high CD rates before they’re gone and the moment variable-rate borrowers start getting relief.