Which central bank sets the federal funds rate?

Which central bank sets the federal funds rate? The answer is the Federal Reserve.

More precisely, the Federal Open Market Committee (FOMC), a body within the U.S. Federal Reserve System, sets a target range for the federal funds rate. This is the overnight interest rate at which depository institutions lend reserve balances to one another without collateral. The rate itself is negotiated in the market, so the Fed influences it rather than directly dictating every transaction.

The federal funds rate is a central tool of U.S. monetary policy. The FOMC raises its target range when it wants to restrain demand and inflationary pressure, and lowers it when it wants to support borrowing, investment, employment, and economic activity. Changes can ripple through other short-term rates, mortgages, business loans, asset prices, and the exchange value of the dollar.

The FOMC typically meets eight times a year, though it can meet more often. The Federal Reserve Bank of New York publishes the effective federal funds rate, calculated from actual overnight transactions. This distinction explains a common mix-up: the Fed sets the target, while market participants determine the effective rate within the policy framework.