The Federal Funds Rate
The federal funds rate1 is the FOMC's main policy rate. Changes in the federal funds rate trigger changes in other short- and medium-term interest rates, the foreign exchange value of the U.S. dollar and other asset prices that influence households' and businesses' spending and investment decisions.
To provide more accommodation during the financial crisis and the deep recession that followed, the FOMC cut the federal funds rate to its effective lowest level, where it remained until December 2015. Subsequently, the FOMC increased rates very gradually over a period of three years, reaching 2-1/4 to 2-1/2 percent in December 2018. The Committee maintained that range until July 2019 when, citing the implications of global developments for the economic outlook and muted inflation pressures, the FOMC voted to reduce the federal funds rate range by 25 basis points. The Committee reduced the range an additional 25 basis points in September 2019 and again in October 2019.
The federal funds rate target range remained at 1-1/2 to 1-3/4 percent until March 3, 2020. Citing evolving risks to economic activity posed by the coronavirus, the FOMC cut the target range by 50 basis points and followed up with an additional 100 basis point cut on March 15, 2020, bringing the target range for the federal funds rate to 0 to 1/4 percent. In explaining its move, the FOMC noted that the effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. More information on the Federal Reserve’s response to the virus can be found here.
1 To be precise, certain financial institutions hold reserve balances at the Federal Reserve (depository institutions, Federal Home Loan Banks, Fannie Mae and Freddie Mac, etc.). The federal funds rate is the interest these institutions charge when they lend reserves to other institutions overnight.