Fed Funds Rate
In short
Federal Reserve's key interest rate — influences all other rates in the economy
The Fed funds rate is the interest rate banks charge each other overnight. When the Fed raises it, borrowing becomes more expensive everywhere — mortgages, car loans, business loans. Higher rates usually hurt stocks, especially growth stocks.
The federal funds rate is the primary monetary policy tool. The Fed raises rates to fight inflation (makes borrowing expensive, slows spending) and cuts rates to stimulate the economy. Rate changes ripple through all financial markets — bond yields, mortgage rates, stock valuations.
Thresholds
- 0-1
- Emergency easing — stimulus mode
- 1-3
- Accommodative — supportive for stocks
- 3-5
- Neutral to restrictive
- 5-7
- Restrictive — headwind for growth stocks
- > 7
- Very restrictive — recession risk
Related concepts
- Inflation Rate — Inflation measures how fast prices are rising. At 2%, things cost 2% more each year — acceptable. At 8%, your money loses value fast, and the Fed raises rates to fight it, which usually hurts stocks.
- Yield Curve — Normally, long-term bonds yield more than short-term ones (upward sloping). When short-term yields exceed long-term (inverted curve), it's historically predicted every US recession in the past 50 years. Investors call this the most reliable recession indicator.
- Treasury Yield — Treasury yields are the interest rates the US government pays to borrow money. They're the foundation of all financial pricing. When 10-year yields rise, it hurts stocks (especially growth stocks) because bonds become a more attractive alternative.
- Risk-Free Rate — The rate you earn on the safest available investment, typically short- to medium-term government debt. Everything else gets compared against it — if a 10-year government bond pays 4%, why accept only 3% from a riskier stock or corporate bond with no extra compensation?