The Federal Fund Rate is the interest rate established by the Federal Open Market Committee (FOMC) for funds loaned by banks and credit unions to other banks and credit unions from required reserves kept at the Federal Reserve. The FOMC meets eight times a year to evaluate US monetary policy and actions, including raising or lowering the Federal Fund Rate.
Banks and credit unions, classified under federal law as depository institutions, are required to maintain mandatory reserve balances at the Federal Reserve. Depository institutions with surplus balances may loan those surplus funds to other depository institutions.
While the actual interest rate charged between depository institutions is negotiated between themselves, the Federal Fund Rate serves as a guidepost. The actual interest rates utilized are weighted and known as the effective Federal Fund Rate.
The Federal Fund Rate plays an important role in the US economy. Changes in the Federal Fund Rate affect short-term borrowing and interest rates as well as the stock market.