Fed Funds Rate: Definition & Meaning | Bondfish
The fed funds rate is the interest rate at which U.S. banks lend each other reserve balances overnight, and it is the main lever the Federal Reserve uses to set the overall level of U.S. interest rates.
What it means
The Federal Open Market Committee (FOMC) does not fix the fed funds rate at a single number. Instead it sets a target range (typically 25 basis points wide) and uses tools like interest on reserve balances and its overnight repo facilities to keep the actual rate banks trade at — the effective federal funds rate (EFFR) — inside that band.
On September 16, 2026, the FOMC raised the target range by a quarter point to 3.75%–4.00%, up from 3.50%–3.75%, in a unanimous 12–0 vote, citing still-elevated inflation alongside solid economic activity.
Because so much short-term borrowing is priced off this benchmark, changes to the fed funds rate ripple quickly into other rates: Treasury bill yields, bank prime rates, credit card and mortgage rates, and money-market fund yields all move in response.
Why it matters for bond investors
The fed funds rate anchors the short end of the yield curve and shapes expectations for every other bond maturity. When the Fed raises the target range, newly issued short-term bonds and money-market instruments offer higher yields, and existing fixed-rate bonds tend to fall in price to compete. When cuts are expected instead, longer-duration bonds typically benefit most, since their prices are more sensitive to falling rates. Tracking the fed funds rate — and the FOMC's guidance about where it is heading — is one of the simplest ways a retail bond investor can gauge which direction interest-rate risk is likely to push bond prices next.
Example
Target range: 3.75%–4.00% (set Sept 16, 2026)
Effective federal funds rate (EFFR): trades inside this 25 bp band
A bank borrowing overnight reserves from another bank pays a rate inside the target range, not a single fixed number.
Related terms
See also Bondfish's bond screener to find bonds by yield and maturity as rate expectations shift.
This definition is for general information only and is not investment advice. Bond investing involves risk, including possible loss of principal.