The federal funds rate is the interest rate the Federal Reserve sets for banks to lend to each other overnight

The federal funds rate is not a rate you earn on your savings account. It is the rate the Federal Reserve — the central bank of the United States — sets as a target for the interest rate banks charge each other when they lend reserve balances overnight. The Federal Reserve does not set this rate by law; instead, it announces a target range, and banks trade at rates within that range based on supply and demand.

This overnight lending rate between banks matters to you because it influences the rates banks offer on savings accounts, money market accounts, certificates of deposit (CDs), and other savings products. When the Fed raises its target rate, banks typically raise the rates they pay on savings. When the Fed lowers its target rate, savings rates usually fall. The connection is not instant — it can take weeks or months — and not all products move by the same amount.

The Federal Reserve's policy committee meets eight times per year to review economic conditions and decide whether to raise, lower, or hold the federal funds rate steady. These decisions are public, announced on specific dates, and followed closely by savers and investors.

Key Takeaways

  • The federal funds rate is the overnight lending rate between banks, set by the Federal Reserve's policy committee, not a rate you earn directly on savings.
  • Changes to the federal funds rate typically filter down to savings account rates, CD rates, and money market rates within weeks or months, though the timing and size of the move varies by bank and product.
  • The Federal Reserve meets eight times per year to decide on rate changes, and these decisions are announced publicly on the Fed's website.
  • A higher federal funds rate environment usually means better rates on savings products, while a lower rate environment means lower rates on savings.

How the federal funds rate affects what banks pay you

Banks use the federal funds rate as a benchmark when pricing their own products. When the Fed raises its target rate, banks have an incentive to raise the rates they offer on savings accounts and CDs because they can earn more from lending money out. When the Fed lowers its target rate, banks lower what they pay savers because they earn less from lending.

The relationship is strongest for products tied directly to short-term rates, such as money market accounts and short-term CDs. Longer-term CDs and bonds respond more slowly and sometimes move in the opposite direction if investors expect the Fed to cut rates in the future. Online banks and credit unions often move faster than large national banks, so the same Fed rate change may show up in your savings account sooner at one institution than another.

Where to find the current federal funds rate

The Federal Reserve publishes the current federal funds rate target on its official website, federalreserve.gov. After each policy meeting, the Fed releases a statement that includes the new target range. You can also find historical rates and the dates of past changes on the same site under "Monetary Policy."

Financial news outlets including Bloomberg, CNBC, and the Wall Street Journal report on Fed rate decisions the moment they are announced. If you want to track how your bank's savings rates respond to Fed changes, compare rates on sites like Bankrate, DepositAccounts, or your bank's own website before and after a Fed announcement.

The difference between the federal funds rate and your savings rate

The federal funds rate is a wholesale rate — the rate banks pay each other. Your savings rate is a retail rate — the rate your bank pays you. Banks keep the difference as profit. In a high-rate environment, this spread can be narrow, meaning you capture more of the benefit. In a low-rate environment, the spread widens, meaning banks keep more and you earn less.

For example, if the federal funds rate is 5 percent and your savings account earns 4.5 percent, the spread is 0.5 percent. If the federal funds rate drops to 2 percent and your savings account earns 1.5 percent, the spread is still 0.5 percent — but you are earning less in absolute dollars. This is why shopping around for the best rate matters more in a low-rate environment.

When the Fed raises rates versus when it cuts them

The Federal Reserve raises rates when it wants to slow inflation and cool down the economy. Higher rates make borrowing more expensive, which discourages spending and investment. This is good news for savers because banks offer higher rates on savings products.

The Fed cuts rates when it wants to stimulate the economy during a slowdown or recession. Lower rates make borrowing cheaper, which encourages spending and investment. This is bad news for savers because banks offer lower rates on savings products. Savers who lock in long-term CDs before a rate cut protect themselves by locking in the higher rate for the full term.

How to use Fed rate information when choosing where to save

If the Fed has recently raised rates and the policy committee signals more increases ahead, it may be worth waiting a few weeks before locking in a long-term CD, because rates may climb higher. If the Fed has signaled it will cut rates soon, locking in a CD now protects you from lower rates later.

For savings accounts and money market accounts with no fixed term, the rate can change at any time, so the Fed's rate environment matters less for timing. Instead, focus on finding the highest rate available right now, since you can move your money if rates fall elsewhere. Online banks and credit unions tend to offer higher rates than national banks, so compare across all three categories.

Frequently Asked Questions

Is the federal funds rate the same as the prime rate?

No. The prime rate is what banks charge their most creditworthy customers for loans. The Federal Reserve does not set the prime rate directly, but it typically moves in the same direction as the federal funds rate. Credit card rates and home equity lines of credit are often tied to the prime rate.

Can I earn the federal funds rate on my savings?

No. The federal funds rate is an overnight wholesale rate between banks. You earn retail rates on savings accounts, CDs, and money market accounts, which are lower than the federal funds rate. Your rate depends on your bank's pricing, not the Fed's rate directly.

How often does the Federal Reserve change the federal funds rate?

The Federal Reserve's policy committee meets eight times per year on a published schedule. The committee does not change the rate at every meeting — sometimes it holds the rate steady. You can find the meeting dates and past decisions on federalreserve.gov.

What happens to my CD if the Fed cuts rates after I buy it?

Your CD rate stays the same for the full term, no matter what the Fed does. This is why CDs are useful when you expect rates to fall — you lock in today's rate and keep it. If rates rise instead, you are stuck with the lower rate unless you withdraw early and pay an early withdrawal penalty.

Why do some banks raise savings rates faster than others after a Fed increase?

Banks compete differently for deposits. Online banks and credit unions often raise rates quickly to attract savers. Large national banks may move more slowly because they have more deposits already and less need to compete. Shop around after a Fed rate increase to find which banks are passing the increase to savers fastest.