What Is the Federal Funds Effective Rate? Understanding How This Key Interest Rate Impacts the Economy and Financial Markets

The federal funds effective rate is the interest rate at which banks lend and borrow overnight funds from each other in the federal funds market. This rate is closely watched by financial markets, as it can impact the cost of borrowing for businesses and consumers and can serve as a barometer of the overall health of the economy.

The Federal Reserve sets a target range for the federal funds rate, and the effective rate generally stays within this range. The Fed can adjust the target range as needed to achieve its monetary policy goals, such as promoting maximum employment and stable prices.

Changes in the federal funds effective rate can have a ripple effect on other interest rates, such as those for mortgages, credit cards, and car loans. When the federal funds rate rises, the cost of borrowing tends to go up, which can slow down economic growth. When the federal funds rate falls, the cost of borrowing tends to go down, which can stimulate economic growth.

Traders and investors closely monitor the federal funds effective rate and the Fed's policy decisions, as these can impact the performance of financial markets. It's important to stay up-to-date on the federal funds rate and other economic indicators to make more informed trading and investment decisions.