What is the federal funds rate, and why does the FOMC raise or lower the target rate?
The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. The target federal funds rate is set by the Federal Open Market Committee (FOMC). By setting a target federal funds rate and using the tools of monetary policy–open market operations, discount window lending, and reserve requirements–to achieve that target rate, the Federal Reserve and the FOMC seek “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates,” as required by the Federal Reserve Act. At each of its meeting, the FOMC examines a number of indicators of current and prospective economic developments. Then, cognizant that its actions affect economic activity with a lag, it must decide whether to alter its target for the federal funds rate. An
