The federal funds rate is the interest rate banks charge each other for overnight, unsecured loans of reserves, and, by extension, the Federal Reserve’s primary policy lever. The FOMC sets a target range (for example 4.25–4.50%) at its eight yearly meetings, and steers the effective rate inside it using interest on reserves and the reverse repo facility.
Every other US interest rate keys off this anchor. The 2-year Treasury is essentially a forecast of its average path; SOFR trades within a few basis points of it; mortgages, credit cards, and corporate loans reprice off expectations about where it is heading. That is why markets obsess over “cuts priced in”: fed funds futures translate directly into meeting-by-meeting odds.
Worked example: The target range is 4.25–4.50% and the December fed funds futures contract implies an average rate of 3.97%. That gap of roughly 40bp below the current midpoint means the market prices about one and a half 25bp cuts by December. A hot CPI print the next morning lifts the implied rate to 4.12%, nearly a full cut priced out in one release.
