Federal funds rate
The overnight interest rate at which banks lend reserves to each other, which the Fed steers through a target range.
The federal funds rate is the interest rate at which depository institutions lend reserve balances to one another overnight, usually without collateral. The Federal Reserve sets a target range for it and uses tools such as interest on reserve balances to keep the actual market rate within that range. The rate anchors many other short-term borrowing costs.
On our site, the target range is shown as a range, such as 4.25 to 4.50 percent, and the effective rate is shown separately. The effective rate sitting inside the range means policy is working as intended.
Traders care because it anchors short-term rates, which feed money market yields, loan pricing and the market's view of future policy.
Worked example (illustrative numbers, not real data): the target range is 4.00 to 4.25 percent and the effective rate is 4.08 percent. After a 25-basis-point cut, the range becomes 3.75 to 4.00 percent, and the effective rate would be expected to follow to about 3.83 percent.