Fed Hikes Federal Funds Rate ― What is It?

The Federal Reserve announced this week that it is continuing with its strategy of steadily increasing interest rates amid a strong economy and rising inflation by hiking the benchmark for the federal funds rate by a quarter-percentage point, to a range of between 2% and 2.25%.

What’s the federal funds rate?

The federal funds rate is the interest rate at which banks or credit unions lend reserve balances to other depository institutions on an overnight basis to maintain their reserve requirements in their vaults or on deposit with the Federal Reserve.

Because lenders indirectly base their interest rates for everything from mortgages to car loans and credit cards on the federal funds rate, as it rises and falls it impacts borrowers throughout the economy.

As this chart from our partners at USAFacts shows, prior to the Fed raising the federal funds rate in late 2015 it had been near zero since the onset of the 2008-09 recession. In 2017, the most recent full year for which data is available, the federal funds rate averaged 1%.

Wondering about the peak in the early 1980s? The Federal Reserve responded to the stagflation of the 1970s (conditions of high inflation and unemployment) by raising the federal funds rate to a peak of 16.39% in 1981. That proved temporary, as the rate was down into the single digits two years later before spending much of the next two decades at roughly 5%.

Tell your reps what you think of the Fed’s decision and share your thoughts below!

— Eric Revell

(Photo Credit: iStock.com / MF3d)