About this indicator
About
The U.S. policy rate is the federal funds rate target range set by the Federal Open Market Committee. The FOMC announces decisions at the conclusion of its eight scheduled meetings each year, with the policy statement, Summary of Economic Projections (in March, June, September, and December), and a press conference from the Fed chair. The rate range itself is administered through interest on reserves (IORB) and the overnight reverse repo facility (ON RRP).
Why it matters
The policy rate is the price of overnight money in the world's reserve currency. It cascades into every other dollar rate: Treasury yields, mortgage rates, corporate borrowing costs, and the dollar exchange rate. Equity multiples reprice on changes in the long-run policy path. Emerging-market central banks track Fed moves because dollar-funded debt and capital flows depend on the path. A single 25 basis-point surprise can move trillions in market value.
How it's computed
The FOMC votes on a target range, currently set as a 25 basis-point band. The Fed enforces the range by paying interest on bank reserves (the IORB rate, set at the upper bound) and absorbing excess liquidity through the ON RRP (set at the lower bound). The effective fed funds rate is the volume-weighted median of overnight unsecured interbank borrowing, published the next morning by the New York Fed.
Pitfalls
Headlines focus on the target range; markets focus on the dot plot and the chair's press conference. The policy rate has historically been less than the natural rate during easing cycles and more than the natural rate during tightening cycles — but the natural rate isn't observable, which is why the Fed's r-star estimates get scrutinized as much as the policy rate itself.