What is the Fed funds rate?
Updated on August 24, 2026 · by Alex
The Fed funds rate is the interest range the Federal Reserve sets as the benchmark for very short-term lending between banks. It is the base price of dollar money, and the rates on almost everything else derive from it.
It is not a rate the Fed charges anyone. It is a target: the Federal Reserve announces a range within which it wants banks to lend to each other overnight, and uses its tools to keep the market there.
It is decided eight times a year at the meetings of the Federal Open Market Committee. Each meeting ends with a statement and, four times a year, with the members' own projections of where the rate will be in the future.
Through two channels. The first is direct: if money costs more, companies pay more on their debt, households pay more on their loans, and consumption and investment cool. That reaches company earnings with a lag of a few months.
The second explains the same-day moves, and is subtler. The value of a stock is the money the company will generate in the future, brought back to today's value. The rate is what does the bringing back: if it rises, that future is worth less today, as a matter of arithmetic. And it hits hardest the companies whose earnings sit furthest out — growth companies — rather than those already making money now. That is why the Nasdaq and the Russell 2000 react more than the Dow Jones to a rate surprise.
Expecting the market to react to the decision. It almost never does, because by the time it is announced the market has had it priced in for weeks. What moves the price is the difference between what was expected and what happened, exactly as with quarterly earnings.
That is why a rate cut can come with a falling market: if the market expected two cuts and the Fed chair hints at only one, the good news is in fact worse than forecast. What trades is not the present, it is the change in expectation.
