What is a 'Target Rate '

The target rate is 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. A target range is sometimes designated by the FOMC along with the target rate during times of economic uncertainty. The FOMC controls the target rate through open market operations, which involves the purchases and sales of securities such as U.S. Treasuries or mortgage-backed securities in the open market.

BREAKING DOWN 'Target Rate '

The 12 members who comprise the FOMC 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 activity can cause inflation pressures to build. On the other hand, a rise in the rate limits economic growth and helps control inflation pressures; however, too much of an increase can stall economic growth or even cause it to decline. The FOMC generally seeks a target rate that will achieve the maximum rate of economic growth without sparking inflation.

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 target is typically tied to a particular inflation level considered benign for an economy. For instance, under the Janet Yellen era, the target rate for the federal funds rate was tied to 2% annual inflation. 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.

  1. Federal Open Market Committee (FOMC)

    The Federal Open Market Committee (FOMC) is the branch of the ...
  2. Open Market Operations - OMO

    Open market operations refer to the buying and selling of government ...
  3. Federal Reserve System - FRS

    The Federal Reserve System, commonly known as the Fed, is the ...
  4. Cost of Funds

    Cost of funds is the interest rate paid by financial institutions ...
  5. Overnight Rate

    The overnight rate is the interest rate at which a depository ...
  6. Inflation Targeting

    Inflation targeting is a central banking policy that revolves ...
Related Articles
  1. Financial Advisor

    What to Expect at April's FOMC Meeting

    The Fed won't raise rates Wednesday, but it's worth paying close attention to Yellen's comments about the future trajectory of rates.
  2. Insights

    As Expected, FOMC Leaves Rates Unchanged

    The FOMC left rates unchanged at its latest meeting, sees "improved" sentiment.
  3. Insights

    What are the Federal Reserve Chairman's responsibilities?

    Learn about the duties and responsibilities of the chairman of the Federal Reserve Board, including testifying before Congress and as acting as chair of the FOMC.
  4. Insights

    Fed Projections: Where Do Rates Go From Here?

    Don't put too much faith in forecasts.
  5. Trading

    Yellen Nods to China, Fiscal Policy in Testimony

    Federal Reserve Chair Janet Yellen spoke about the FOMC's​ assessment of domestic and global economic conditions and the anticipated path of the federal funds rate Tuesday afternoon at the Economic ...
  6. Insights

    A Fed Divided: The Unknowns Blocking FOMC Consensus

    We examine what the latest FOMC meeting minutes are telling us about the conversations behind the door of the Eccles Building.
  7. Insights

    Yellen Won't 'Completely Rule Out' Negative Rates

    Since the European Central Bank's adoption of the policy in June 2014, and particularly following Japan's move into negative rates in January, American investors have feared that the Fed could ...
  8. Investing

    Markets Await Federal Reserve (SPY, VTI)

    Stocks opened flat on Wednesday before the Federal Reserve’s release of the minutes from its September meeting.
  1. When was the last time the Federal Reserve hiked interest rates?

    Learn about when the U.S. Federal Reserve last increased the federal funds target rate, which was in June 2006 after the ... Read Answer >>
  2. What are the implications of a low Federal Funds Rate?

    Find out what a low federal funds rate means for the economy. Discover the effects of monetary policy and how it can impact ... Read Answer >>
  3. What are the differences between the Federal Funds Rate and LIBOR?

    Learn the key differences between the federal funds rate and the London Interbank Offered Rate, including currency denomination ... Read Answer >>
  4. How does the Federal Reserve determine the discount rate?

    Learn about the several different kind of discount rates offered to banks and other depository institutions through the Federal ... Read Answer >>
  5. Who determines interest rates?

    In countries using a centralized banking model, interest rates are determined by the central bank. In the first step of interest ... Read Answer >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center