The Federal Funds Rate Target Range is the policy range set by the FOMC for the overnight federal funds rate—the rate banks charge each other for reserve balances overnight. The range is a target, not a fixed obligation; the effective rate tends to move within or near that range as the Federal Reserve uses open market operations to adjust the supply of reserves.
The Fed uses the target range as its primary monetary policy tool to influence short-term borrowing costs and overall financial conditions. After each FOMC meeting, the Fed states the new target range and adjusts the supply of reserves through open market operations to steer the actual rate toward the target. Market participants, including banks, money market funds, and other institutions, reference the target range when pricing ultra-short-term lending and instruments tied to short-term rates, and expectations about the range influence longer-term rates and economic activity. Changes in the target range signal the Fed's policy stance and can affect spreads, liquidity, and consumer and business loan costs indirectly.
The target range differs from the exact rate at which transactions occur daily; it is the Fed's communicated policy stance and a lever for guiding monetary conditions. It interacts with other tools, such as balance sheet operations, to influence liquidity and the cost of funds in the economy.
If the FOMC sets the target range at 5.25% to 5.50%, the effective federal funds rate often trades within that band as banks lend reserves overnight.
Federal Reserve · Federal Open Market Committee (FOMC) · Federal Funds Rate · Open Market Operations · Monetary Policy · Interest Rates