- The federal funds rate is set by the Federal Reserve and is used by banks to borrow money overnight.
- Changes in the federal funds rate influence the interest rates on loans, credit cards, and bank accounts.
- The Fed most recently cut interest rates by a quarter percentage point for a target range of 4.25% to 4.50%.
The major mandate of the Personal loans
The federal funds rate and the economy
During its eight meetings a year, the FOMC can raise, lower, or keep the fed funds rate the same. But what motivates the committee to change it periodically? How does the Fed use it as an economy-adjusting tool?
Stimulating growth
When it needs to stimulate economic growth — production, spending, expansion — the Fed lowers the fed funds rate. This move makes it cheaper for banks to borrow and maintain their reserves. So these banks can then lend out their extra funds at lower costs, encouraging companies and individuals to borrow to expand, invest, and buy things.
Controlling inflation
When the Fed needs to slow down the economy because prices are climbing too fast and causing rampant inflation, the Fed raises the Fed funds rate. Member banks must pay more interest to prevent their required reserve balance from going into the red.
They then raise their interest rates to clients, which tends to slow down borrowing activity. When banks don't finance as much, the money supply contracts and economic growth returns more sustainably.
How the federal funds rate affects you
The federal funds rate is an interbank interest rate. But it has a ripple effect throughout people's financial lives, the interest they pay, and the money they earn.
Borrowing costs
The movement of the Fed funds rate influences the movement of several borrowing rates, including interest rates on loans and credit cards.
The prime rate is the rate a bank can offer its best corporate or high-net-worth individual clients. A shift in the prime rate also influences consumer interest rates. When the prime rate rises or drops, you can expect a corresponding adjustment on the monthly charges of your personal loans, credit cards, and Fed chair Jerome Powell said the cut was "the best decision" to achieve the Fed's mandate of maximum employment and price stability. Powell has said the Fed should move cautiously on cutting rates in 2025.
The Federal Reserve meets eight times a year. The next Fed meeting is January 28 and 29, 2025.
FAQs about the federal funds rate
Who sets the federal funds rate?
The Federal Open Market Committee (FOMC), the Fed's monetary policy-making body, sets the federal funds rate. Members meet once every six weeks to discuss economic conditions and decide whether to increase, decrease, or leave the federal funds rate unchanged.
How often does the federal funds rate change?
The federal funds rate may change multiple times a year or not change for several years. The Federal Reserve analyzes economic growth and activity, meeting eight times yearly to determine whether rates should be raised or lowered.
Why does the Federal Reserve change the federal funds rate?
The Federal Reserve changes the federal funds rate to stimulate economic activity, manage consumer rates, and combat inflation. The Fed will increase, decrease, or keep the rate the same depending on economic activity and projections.
*Varo Savings Account: To earn the highest APY each month (5.00%) on up to $5,000, you must receive at least $1,000 in direct deposits each month and keep your Varo Bank Account balances above $0. Earn 2.50% APY on your remaining balance. Rates are subject to change at any time.
**LendingClub LevelUp Savings Account: Earn 4.40% APY when you deposit at least $250 per month, earn 3.40% standard APY if minimum isn't met.
***Barclays Tiered Savings Account: Accounts with $250,000 or less will earn 4.00% APY, accounts with over $250,000 will earn 4.20% APY. Rate are determined by balance tiers and amount deposited.
1Platinum Savings is a tiered interest rate account. Interest is paid on the entire account balance based on the interest rate and APY in effect that day for the balance tier associated with the end-of-day account balance. *APYs — Annual Percentage Yields are accurate as of September 23, 2025: 0.25% APY on balances of $0.01 to $4,999.99; 3.85% APY on balances of $5,000.00 or more. Interest Rates for the Platinum Savings account are variable and may change at any time without notice. The minimum to open a Platinum Savings account is $100.
2Based on comparison to the national average Annual Percentage Yield (APY) on savings accounts as published in the FDIC National Rates and Rate Caps, accurate as of September 15, 2025.
1 APY — Annual Percentage Yield is accurate as of September 23, 2025. Interest Rates for the Savings Connect Account are variable and may change at any time without notice. The minimum to open a Savings Connect account is $100. Fees could reduce earnings on the account.
2Based on comparison to the national average Annual Percentage Yield (APY) on savings accounts as published in the FDIC National Rates and Rate Caps, accurate as of September 15, 2025.
