Effective Federal Funds Rate

The federal funds rate is a key element in how banks operate in the U.S. The effective federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements. The Federal Reserve uses the federal funds rate as a tool to control U.S. economic growth. "Banks can transfer money from the federal funds among themselves—and be subject to the federal funds rate—or make a transfer from the Fed to themselves on behalf of bank customers on a same-day basis, which is called the discount window."

The rates shown are the rates that the Federal Reserve is targeting with its open market operations, along with the other tools of monetary policy (discount rate and reserve requirements). The height can be seen in the 1980's, but the Federal Reserve tries to decrease to try to spur the growth of the economy. This can bee seen in the periods of the 1980's and the Great Recession of 2008. During 2010, the federal funds rate reached Zero Lower Bound. Zero Lower Bound is when the central bank wants to lower the short-term nominal interest rates, but faces an obstacle when the interest rate reaches or nears zero, and cannot lower it further. The reason they would want to lower interest rates would be to stabilize the economy, but they can no longer do this because its reached the lowest point. Recently, the Federal Reserve has been increasing the federal funds rate because the economy has been improving.