Target Rate


DEFINITION of 'Target Rate '

The interest rate charged by one depository institution on an overnight sale of balances at the Federal Reserve to another depository institution, as determined by the Federal Open Market Committee (FOMC) of the Federal Reserve.

The 12 members who comprise the Federal Open Market Committee meet for eight regularly scheduled meetings per year. During these meetings, the FOMC reviews economic and financial conditions and determines the federal funds target rate. A decline in the target rate could stimulate economic growth; however, too much economic activity can cause inflation pressures to build. A rise in the rate limits economic growth and helps control inflation pressures; however, too great an increase can stall economic growth. The FOMC seeks a target rate that will achieve the maximum rate of economic growth.

BREAKING DOWN 'Target Rate '

The FOMC may schedule additional meetings as necessary to implement changes in the target federal funds rate. At any of the FOMC's meetings, the federal funds target rate may increase, decrease or remain unchanged depending on the economic conditions in the United States. A change in the federal funds rate can affect other short-term interest rates, longer-term interest rates, foreign exchange rates, stock prices, the amount of money and credit in the economy, employment and the prices of goods and services.

The Federal Reserve Act of 1913 charged the Federal Reserve with setting monetary policy to influence the availability and cost of money and credit.

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