Federal Funds Rate
Definition
The federal funds rate is the interest rate at which US banks lend reserve balances to each other overnight on an unsecured basis. It is the Federal Reserve's primary policy rate: the FOMC sets a target range for it, and the effective fed funds rate trades within that range.
The Fed steers the rate mainly through administered rates — interest on reserve balances and the overnight reverse repo facility — rather than the older mechanism of daily open-market operations. Changes in the target range ripple out to the entire curve: money-market rates, floating-rate loans (often benchmarked to SOFR, which tracks policy closely), mortgage rates, and ultimately discount rates used in valuation.
In interviews, the key chain is: FOMC moves the policy rate → short-term borrowing costs change → this transmits to consumption, investment, asset prices, and the dollar, with long lags.
Why interviewers ask
Almost every 'walk me through what the Fed does' or 'how do rate hikes affect valuations' question starts here. Interviewers expect you to know who sets it (the FOMC), that it is a target range for an overnight interbank rate, and how changes flow through to discount rates, multiples, and deal activity. Never quote a stale number — describe the mechanics and, if asked, the current level only if you actually know it.
Related terms
Interviews don't test definitions — they test recall under pressure.
Drill 1,500+ real questions with spaced repetition. Free to start — 10 reps a day on the house.