The US federal interest rate, often referred to as the Federal Funds Rate, is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. It’s set by the Federal Open Market Committee (FOMC) of the Federal Reserve (the Fed), which is the central bank of the United States.
The federal funds rate serves several key purposes:
1. **Monetary Policy Tool**: It’s a primary tool for the Federal Reserve to influence economic growth. By adjusting this rate, the Fed can influence borrowing costs, consumer spending, and business investment.
2. **Inflation Control**: Raising the rate can help slow down an overheating economy and control inflation, while lowering the rate can stimulate economic growth by making borrowing cheaper.
3. **Liquidity Management**: The rate influences the amount of money circulating in the economy. A lower rate increases liquidity by encouraging lending, while a higher rate can reduce liquidity.
4. **Economic Indicators**: Changes in the federal funds rate can signal the Fed’s outlook on the economy. For example, a rate cut might indicate concerns about economic slowdown, while a rate hike might suggest confidence in economic growth.
5. **Benchmark for Other Rates**: Many interest rates, like those for mortgages, savings accounts, and loans, are influenced by the federal funds rate.
Overall, the federal funds rate is a crucial part of the Fed’s monetary policy and plays a significant role in the overall health of the U.S. economy.