The federal funds rate is the interest rate banks charge each other for overnight loans of reserve balances held at the Federal Reserve. As of March 2026, the target range set by the Federal Open Market Committee sits at 3.50 to 3.75 percent, and the actual rate banks pay hovers near the middle of that range at roughly 3.64 percent.1Federal Reserve Bank of New York. Effective Federal Funds Rate That single number ripples through nearly every borrowing and saving product you touch, from your credit card APR to the yield on your savings account.
What This Rate Actually Measures
Every business day, banks close out with either more cash than they need or less. A bank sitting on excess reserves can lend that money overnight to a bank running short, and the interest on that loan is the federal funds rate.2Federal Reserve. Economy at a Glance – Policy Rate These loans are unsecured. The borrowing bank pledges no Treasury bonds or other collateral, so the deal rests entirely on its standing within the banking system.1Federal Reserve Bank of New York. Effective Federal Funds Rate
The number published each morning, called the effective federal funds rate, is a volume-weighted median of all the overnight transactions banks reported the day before. It is the going market price for overnight cash, landing somewhere inside the range the Federal Reserve has targeted.
How the Federal Reserve Sets the Target
The Federal Open Market Committee (FOMC), created under the Federal Reserve Act, directs all Federal Reserve open-market operations.3Office of the Law Revision Counsel. 12 US Code 263 – Federal Open Market Committee Creation Membership Regulations Governing Open-Market Transactions The committee has twelve members and holds eight scheduled meetings a year.4Federal Reserve. FOMC Calendars At each meeting, members weigh inflation, employment, and broader conditions, then vote to raise, lower, or hold the target range. The current 3.50 to 3.75 percent range followed a series of cuts in late 2024 and 2025, with the committee holding steady through early 2026.5Federal Reserve. The Fed Explained – Accessible Version
The FOMC announces a range rather than a single number because the rate itself is set by supply and demand between private banks. The committee builds the guardrails; the market decides where the rate lands within them.
One of the strongest guardrails is the interest on reserve balances (IORB) rate, currently 3.65 percent.6Federal Reserve Board. Interest on Reserve Balances A bank finishing the day with extra cash can lend it to a peer or leave it at the Fed and earn the IORB rate risk-free. No bank has reason to lend for less than that, so the IORB rate acts as a floor. By adjusting it, the Fed can pull the effective rate toward its target without buying or selling securities at all.7Federal Reserve. Interest on Reserve Balances IORB Frequently Asked Questions
How It Reaches Your Wallet
The prime rate is the direct pipe between the FOMC’s decisions and the interest rates you actually pay. Most major banks set their prime rate by adding three percentage points to the top of the federal funds target range.8Federal Reserve. The Federal Funds Target Rate and Business and Household Borrowing Rates With the target at 3.50 to 3.75 percent, the prevailing prime rate is 6.75 percent.9Federal Reserve. H.15 – Selected Interest Rates Daily When the FOMC moves, the prime rate follows within days, and everything priced off prime moves with it.
Credit Cards
Most credit cards tie their APR to the prime rate, usually expressed as “prime plus” a margin based on your creditworthiness. A card advertised at prime plus 14 percent carries an APR of 20.75 percent at today’s prime. When the Fed cuts or raises, the change flows to your statement within one or two billing cycles.
Adjustable-Rate Mortgages and HELOCs
Adjustable-rate mortgages and home equity lines of credit reset periodically against a benchmark. Many HELOCs reference the prime rate directly, so a 0.50 percent Fed increase translates to roughly a 0.50 percent bump at the next adjustment. ARMs may reference prime or another benchmark, but the direction tracks the Fed either way.
Auto Loans
Auto loan rates also track the prime rate, though the correlation is looser than with credit cards because your individual credit score plays a bigger role. When the federal funds rate is high, the floor for auto lending rises. When it drops, average rates follow, though lenders adjust more slowly than they do for revolving credit.
Small Business Lines of Credit
Unsecured business lines are typically priced at prime plus a spread reflecting the lender’s read of the business and its owner. Spreads range from under two percentage points to nearly ten above prime depending on the borrower’s profile. The federal funds rate sets the starting line; the bank’s risk assessment decides how far above it you land.
What the Federal Funds Rate Does Not Control
Not every interest rate follows the Fed. Confusing the ones that do with the ones that don’t can lead to costly decisions.
Existing Fixed-Rate Loans
If you already hold a fixed-rate mortgage, auto loan, or personal loan, changes to the federal funds rate have no effect on your payment. Your rate was locked when you signed. Only variable-rate products adjust, so borrowers with existing fixed-rate debt can ignore rate-hike headlines entirely.
Federal Student Loans
Federal student loan rates are set once a year based on the yield from a 10-year Treasury note auction, not the federal funds rate. Rates for loans disbursed between July 1, 2025, and June 30, 2026, were fixed by the final Treasury auction held before June 1, 2025, plus a statutory margin that varies by loan type.10Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1 2025 and June 30 2026 Treasury yields and the federal funds rate often drift in the same direction, but they are not the same thing and can diverge.
New 30-Year Fixed Mortgage Rates
The rate on a new 30-year fixed mortgage is driven mainly by yields on long-term Treasury bonds and demand in the mortgage-backed securities market. The Fed’s short-term rate influences the broader economy and can nudge mortgage rates indirectly, but the relationship is weaker than most people assume. The Fed can cut its target while 30-year mortgage rates rise, and the reverse can also happen.
What It Means for Savers
When the overnight rate climbs, banks compete harder for deposits by paying better yields on savings accounts, money market accounts, and certificates of deposit. The logic is direct: if a bank can earn more by lending reserves to another bank, it needs to offer depositors a competitive return to keep cash on hand.
A high-rate environment is genuinely good for savers. Online banks, with lower overhead, tend to pass increases through more aggressively than traditional institutions, so shopping around during a high-rate stretch can meaningfully change what you earn.
Interest on savings and deposit accounts is taxable income. Your bank must send you IRS Form 1099-INT if the interest paid during the year totals $10 or more.11Internal Revenue Service. About Form 1099-INT Interest Income Even if you earned less than that and no form arrives, the IRS still expects the income on your return.
SOFR: The Other Benchmark on Your Loan Documents
The federal funds rate is not the only overnight benchmark that matters. The Secured Overnight Financing Rate (SOFR) measures the cost of overnight borrowing using Treasury securities as collateral.12Federal Reserve Bank of New York. Secured Overnight Financing Rate Data SOFR is based on repurchase agreements backed by Treasuries, so unlike the federal funds rate, it is secured. The two benchmarks tend to move together but are not identical.13Office of Financial Research. OFR Short-Term Funding Monitor – Federal Reserve Bank of New York Reference Rates
SOFR replaced the London Interbank Offered Rate (LIBOR) as the dominant U.S. dollar benchmark after all USD LIBOR panel settings ceased on June 30, 2023.14Federal Reserve Bank of New York. Transition From LIBOR If you took out an adjustable-rate mortgage, business loan, or floating-rate product in the past few years, its resets may well be tied to SOFR rather than to the prime rate. The practical result is similar: when the Fed moves its target, SOFR and the federal funds rate shift with it, and your borrowing cost follows.