Confirmed: The federal funds rate is the interest rate at which depository institutions lend reserve balances to each other overnight, and the Federal Open Market Committee (FOMC) sets a target range for it — currently 3.75 to 4 percent, held on 28 October 2026 after a quarter-point increase on 16 September. Reported, not a Fed announcement: market-implied probabilities for December, which move daily and are not quoted as a settled outcome here. What is federal funds rate explained in one sentence: the price of overnight money between banks, steered by the central bank. This article is general information only, not personal financial advice.
“Federal funds” are not money the federal government lends to the public. They are balances banks hold at the Federal Reserve. A bank short of reserves can borrow overnight from a bank with a surplus; the rate on that loan is the federal funds rate. It matters because the Fed steers it, changing the cost of money throughout the economy.
A range, not a single number — and how the Fed keeps the rate inside it
The Fed does not announce ‘the rate is 3.87 percent.’ It announces a target range. Since 17 September 2026 the range has been 3.75 to 4 percent. Within that band, the actual daily rate — the effective federal funds rate — moves with supply and demand for reserves. The Fed keeps the market rate inside the band; it does not fix it at a single point.
It does so mainly through two administered rates in the implementation note accompanying each decision. The interest rate paid on reserve balances was maintained at 3.90 percent effective 29 October 2026. Banks earn that rate on balances at the Fed, so they have little reason to lend reserves for much less — a soft floor near the top of the range. The standing overnight reverse repurchase facility offers 3.75 percent, the bottom of the range, helping prevent the rate falling below the band. The standing overnight repurchase rate, at 4.0 percent, caps the top. The Fed also directs the New York Fed’s trading desk to undertake open market operations as necessary to maintain the rate in the range.
The primary credit rate — for direct borrowing from the Fed’s discount window — is separate, kept at 4.0 percent in October. It is not the federal funds rate. The federal funds rate is a market rate between banks, steered by the Fed; the primary credit rate is a rate the Fed itself charges. They move together, but through different votes: the FOMC sets the target range, while the Board of Governors sets the interest on reserve balances and approves the primary credit rate.
Who decides: the FOMC, eight times a year
The FOMC is the Fed’s monetary policymaking body: twelve members — the seven Board of Governors members, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents, serving one-year rotating terms. It holds eight scheduled meetings a year, announcing decisions at 2 p.m. Eastern Time on the second day. The October statement was released at 2 p.m. EDT on 28 October, approved by a 10–2 vote.
The Committee decided ‘to maintain the target range for the federal funds rate at 3-3/4 to 4 percent, in support of the Federal Reserve’s dual mandate.’ Voting against were Lisa D. Cook and Beth M. Hammack, ‘who preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.’ A dissent is not a forecast: it records what two members preferred then; it does not commit the Committee next time. September’s decision was unanimous, 12–0, to raise the range. Together: raised in September, paused in October, two members wanting to keep raising. For the full account, see the Federal Reserve October 2026 rate decision explainer.
The October statement summarised what the Committee weighed: activity ‘expanding at a strong pace,’ resilient spending, strong productivity, robust investment, job gains that ‘have kept pace with the workforce,’ an unemployment rate that ‘has changed little,’ inflation that ‘remains elevated,’ and uncertainty elevated ‘owing, in part, to geopolitical developments.’
The dual mandate: jobs and stable prices, and the 2% target
Congress gave the Federal Reserve a statutory mandate ‘to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.’ The first two goals are the dual mandate. The FOMC explains its interpretation in its Statement on Longer-Run Goals and Monetary Policy Strategy, first adopted in 2012 and most recently amended effective 22 August 2025.
Maximum employment does not mean zero unemployment. It means, in effect, the highest employment the economy can sustain without elevated inflationary pressure. There is no fixed unemployment target. In September 2026, BLS reported unemployment at 4.2 percent, payrolls up 29,000 — both little changed, the rate in a narrow 4.1 to 4.3 percent range since March.
Price stability has a number: 2 percent. The FOMC ‘reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run’ with its mandates. Three clarifications matter. First, the target is PCE inflation, not CPI: in September 2026, PCE inflation was 3.6 percent and CPI inflation 3.7 percent. Second, 2 percent is a longer-run goal, not a monthly ceiling. Third, the target is 2 percent inflation, not zero — a buffer against deflation, with room to cut rates in a downturn.
Why two goals? Because the tools pull in opposite directions when both sides are out of balance. Raising rates to cool inflation also cools hiring; lowering rates to support jobs can add to inflation. When the goals conflict sharply, the Committee takes a balanced approach, weighing how far each goal is from its objective. That balancing act is the whole job.
What is federal funds rate explained through an example: why 0.25% matters
A quarter of a percentage point — 25 basis points — sounds trivial. It matters for three reasons: arithmetic, signalling and expectations.
The arithmetic is easiest. A quarter point is a quarter of one percent of a balance per year, before compounding, fees and any lender margin. On $10,000 carried for a year, 0.25 percent is $25; on $100,000, $250. Those are illustrations of the rate change alone, not quotes for any product. Applied to the trillions borrowed and saved in the economy, a quarter point moves billions in annual interest between borrowers and savers. The same rise that costs a borrower more also, in principle, pays a saver more.
The signalling reason is subtler. A decision is also a statement about how the Committee reads the economy. The September increase, after nine months held steady, told markets the Committee judged inflation too high to leave policy unchanged. The October hold, with two dissents favouring another rise, said it wanted more information before moving again.
The third reason is expectations. Much of the rate’s power works through what people expect next. If households expect rates to stay higher for longer, they borrow more cautiously today. That is why traders’ pricing of future meetings — tracked by the CME FedWatch tool — moves markets, though it is not a Fed forecast. For December pricing, which changes daily, see the CME FedWatch December probability explainer. Treat any single-day probability as a snapshot, not a promise.
How the rate reaches credit cards, mortgages and savings
The Fed does not set the rate on any household product directly. It steers one overnight wholesale rate, and other rates respond through different channels, at different speeds, sometimes in different directions. The chain is real, but it is not a single wire.
Credit cards and other variable-rate borrowing tied to the prime rate respond most directly. Prime is a benchmark banks use for their most creditworthy customers, typically a few percentage points above the federal funds range, and many card and home-equity contracts are prime plus a margin. When the range moves, prime typically follows within days, and variable balances re-price at the next billing cycle or reset date under the contract’s terms — which this article does not assess.
Fixed-rate mortgages are the great exception. A 30-year fixed mortgage is not priced off the overnight rate. It is priced mainly off longer-term rates — above all the 10-year Treasury yield — reflecting expectations about future inflation and Fed policy. That is why fixed mortgage rates can rise or fall while the Fed holds. Adjustable-rate mortgages may respond more directly. For the full chain, and why no current mortgage rate is quoted here, see the Fed decision and mortgage rates explainer.
Savings work in the same direction. When the policy rate rises, competition for deposits tends — over time, unevenly and with lags — to push up savings and deposit yields. When it falls, yields drift down. Pass-through is neither instant nor complete.
Four errors are worth naming. First, the federal funds rate is not the rate the Fed charges the public, nor the rate on government debt. Second, it is not the prime, mortgage or savings rate — those respond to it, imperfectly. Third, a hold is not a cut and not a promise: holding at 3.75 to 4 percent keeps costs at the September level. Fourth, the rate is not a dial for inflation alone.
Finally, policy works with lags: a rate change affects spending, hiring and prices over months, not days. That is why the FOMC said more information would help it determine the stance for ‘a timely return of inflation to the Committee’s 2 percent goal.’
Frequently asked questions
What is the federal funds rate right now?
The FOMC’s target range is 3.75 to 4 percent, held on 28 October 2026 after a quarter-point increase on 16 September. The market rate trades within the range, steered by the interest on reserve balances (3.90 percent) and the overnight reverse repurchase rate (3.75 percent).
Who sets the federal funds rate?
The Federal Open Market Committee (twelve members) sets the target range at eight scheduled meetings a year. The Board of Governors separately sets the interest rate on reserve balances and the primary credit rate.
Is the federal funds rate the same as the mortgage rate?
No. The Fed does not set mortgage rates. Fixed-rate mortgages are priced mainly off longer-term yields and expectations. Variable-rate products tied to prime respond more directly.
Why does the Fed target 2% inflation instead of 0%?
The FOMC judges 2 percent PCE inflation, over the longer run, most consistent with maximum employment and price stability. A small positive target buffers against deflation and leaves room to cut rates in downturns, while keeping inflation low and predictable. The target is for PCE inflation, not CPI.
Updated: 1 November 2026. The target range and rates are as announced on 28 October 2026. PCE and CPI figures are for September 2026.
SOURCES
- Board of Governors of the Federal Reserve System, “Federal Reserve issues FOMC statement,” 28 October 2026 — https://www.federalreserve.gov/newsevents/pressreleases/monetary20261028a.htm
- Board of Governors of the Federal Reserve System, “Implementation Note issued October 28, 2026” — https://www.federalreserve.gov/newsevents/pressreleases/monetary20261028a1.htm
- Board of Governors of the Federal Reserve System, “Federal Reserve issues FOMC statement,” 16 September 2026 — https://www.federalreserve.gov/newsevents/pressreleases/monetary20260916a.htm
- Board of Governors of the Federal Reserve System, “The Federal Open Market Committee (FOMC)” — https://www.federalreserve.gov/monetarypolicy/fomc.htm
- Board of Governors of the Federal Reserve System, “Economy at a Glance — Policy Rate” (last updated 28 October 2026) — https://www.federalreserve.gov/economy-at-a-glance-policy-rate.htm
- Federal Open Market Committee, “2025 Statement on Longer-Run Goals and Monetary Policy Strategy,” adopted effective 24 January 2012, as amended effective 22 August 2025 — https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2025.htm
- U.S. Bureau of Labor Statistics, “Consumer Price Index — September 2026,” USDL-26-1574, 14 October 2026 — https://www.bls.gov/news.release/cpi.htm
- U.S. Bureau of Economic Analysis, “Personal Consumption Expenditures Price Index” (current release 29 October 2026) — https://www.bea.gov/data/personal-consumption-expenditures-price-index
