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 of 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, in 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.