The federal funds rate is a target interest rate that guides lending between U.S. banks over night. This rate, in turn, affects the interest rates customers are charged to borrow money and paid for saving money. The Federal Open Market Committee – a division within the Federal Reserve – determines the federal funds rate. This committee comprises up to 12 voting members who hold eight meetings annually to review the economic and financial health of the U.S. in addition to monetary policy. The FOMC’s goal is to keep the economy in shape by stabilizing prices and maximizing employment. How Federal Funds Rate Works If you’ve ever wondered how banks get money to provide customers loans and other lines of credit, it comes from the cash you deposit into financial accounts. To ensure stability, regulators require financial institutions to have a minimum amount in their reserves. It’s similar to how some banks require you to have a minimum balance in your checking account to avoid fees. To ensure banks meet their reserve requirements, they often borrow funds from banks who have excess cash. The federal funds