federal reserve

Timeline: The federal funds rate at work

The following is a historic look at some of the highs and lows of the federal funds rate since the 1970s. Click on the year to find out the economic events that forced a rate change by the Fed.

1980 Federal Funds Rate 1980 Federal Funds Rate 1984 Federal Funds Rate 2003 Federal Funds Rate 2008 Federal Funds Rate 2012 Federal Funds Rate 2007 Federal Funds Rate 1993 Federal Funds Rate 1981 Federal Funds Rate 1974 Federal Funds Rate

The actual federal funds rate is the weighted average of interest rates that banks charge each other. It's set by open market competition but comes remarkably close to the target set by the Fed.

The Federal Reserve, our nation's central bank, has big weapons in its arsenal to keep the economy growing or to slow it down when inflation appears.

One of those weapons -- arguably its most significant -- is the federal funds rate, the interest rate banks charge each other for overnight loans. The Federal Open Market Committee sets a target for the rate. The actual federal funds rate is the weighted average of interest rates that banks charge each other, though it is usually close to the FOMC's target rate.

"It's a way of influencing how the economy works,'' says Allan H. Meltzer, professor of political economy at Carnegie Mellon University and author of "A History of the Federal Reserve.''

Essentially, the Fed uses this interest rate on banks' overnight loans as a lever on the economy. When the federal funds rate goes higher, banks are more reluctant to borrow from each other, and the trickle-down effect of higher interest rates on loans for individuals and businesses takes steam out of the economy.

On the other hand, a lower federal funds rate triggers more bank borrowing, which in turn greases the wheels for economic growth.

 

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