The Fed Funds Rate and Why It Matters

The Fed funds rate is the rate that banks essentially charge to lend money to each other on an overnight basis. All financial institutions have to keep by law a certain percentage of their customers money on reserve. So when the feds raise the rates, that these banks need to pay each other for overnight money, what that does is this: It lowers the supply of money in the economy and increases short-term interest rates. And all of this, by the way, is supposed to help keep inflation going lower and lower.