Federal Funds Rate: What Is It And How Does It Affect You?

You might have heard of the Federal Reserve and the terms federal funds rate, and discount rate.

But what do they mean? And more importantly, how do they affect you?

The short answers are:

• The Federal Reserve is the central bank system providing financial services to banks and government entities. It does not provide services directly to consumers.
• The Federal Funds Rate is set by the Federal Reserve. It is the target interest rate they wish to have banks charge each other to borrow money from one another overnight to maintain their required “reserve” in the central bank.
• The Discount Rate is the interest rate the Federal Reserve charges banks to borrow directly from them. This rate is set higher than the target fed funds rate.

In December 2008 during the height of the Great Recession, the effective federal funds rate was cut to .09%. It remained between 0-.25% until December 2105, then gradually increased over the years to 2.25–2.5% in December of 2018.

Since then, the United States Federal Reserve has cut the Federal Funds Rate three times in 2019. As the year comes to a close, it now sits between 1.50–1.75%.