Federal funds rate

What it is and why it anchors everything

The federal funds rate is the overnight rate at which banks lend their reserves to each other, and the Federal Reserve sets a target range for it. It is the shortest and most directly controlled interest rate in the economy, and almost everything else is priced as a spread above or below it.

How it reaches the national debt

The link is quickest at the short end of the government’s borrowing. Treasury bills mature within a year and are refinanced constantly, so their yield tracks the policy rate closely. A change in the target range shows up in the cost of new bills within weeks, and in the average rate on the whole debt much more slowly, as longer securities mature and are replaced.

What the target does not control

It does not set long-term rates. The 10- and 30-year yields are decided by the market and reflect expectations about growth, inflation and the supply of debt over years, not the current target. That is why long-term borrowing costs can rise while the Fed is cutting, which is what the term premium is about.