The last time the U.S. Federal Reserve increased the federal funds rate was in June 2006, when the rate was increased from 5 to 5.25%. The federal funds rate represents the interest rate at which the most creditworthy depository institutions lend balances to each other overnight. The Federal Open Market Committee (FOMC) determines the target rate for trading in the federal funds market using open market operations by buying and selling securities.

Federal Funds Rate

The federal funds rate is one of the most crucial rates in the U.S. economy because it indirectly affects broad economic indicators such as employment, growth and inflation. While the federal funds rate is determined through market forces, FOMC greatly influences its determination by communicating its target for the federal funds rate and trading government securities on the federal funds market.

Historic Federal Funds Target Rate

FOMC telegraphs its federal funds rate after very carefully assessing general economic conditions domestically and to some extent abroad since the U.S. gross domestic product (GDP) is dependent on trade with the rest of the world. From 1980 to 2015, the target federal funds rate has had a maximum value of 9.8125%, which occurred in 1989, as the Fed raised interest rates in response to rising inflation.

After June 2006, FOMC consistently decreased the federal funds target rate from 5.25 to 1% in October 2008. Beginning in November 2008, the target rate was decreased to between 0 and 0.25%, and it has stayed in this range to stimulate the U.S. economy. In 2014 and early 2015, FOMC intended to raise the target rate. However, due to unfavorable economic developments at home and abroad, FOMC postponed an interest rate hike until late 2015.

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  2. Is the prime rate in the US different from the federal funds rate?

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  3. How do open market operations affect the U.S. money supply?

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  4. What are the differences between the Federal Funds Rate and LIBOR?

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