New on FinoLib · Volume I: Global Economy
New on FinoLib, my finance education website: I have published an article called Federal Funds Rate Explained: How the Fed Sets Interest Rates, from Volume I: Global Economy. Here is what the article explains, written as a short expert briefing; the full piece, with every worked example, is one click away.
The idea in plain words
The Fed sets the federal funds rate inside a quarter-point target range by paying interest on reserve balances and offering an overnight reverse repo rate, with its lending rates as the ceiling. A rate change reaches variable-rate cards and loans within weeks, but reaches mortgages only through the 10-year Treasury yield.
Key points
■The target range has been 3.75–4.00% since September 17, 2026, with interest on reserve balances at 3.90%, the overnight reverse repo rate at 3.75% and the primary credit and standing repo rates at 4.00%.
■On October 1, 2026, the EFFR was 3.88% on $120 billion of loans, and SOFR printed 3.87% on $3.07 trillion of trades.
■With $2.95 trillion of reserves in the system in late September 2026, a few billion either way no longer changes what an overnight loan is worth; in January 2019 the FOMC committed to an ample reserves regime.
■In September 2026 all four administered rates moved up by 0.25 point, effective the day after the decision.
A closer look
What the rate is. Banks keep accounts at the Federal Reserve, and the balances in them are called reserves. Institutions with spare reserves lend them overnight, without collateral, to institutions that want more; the rate on these loans is the federal funds rate. Each business day the New York Fed publishes the effective federal funds rate (EFFR), the volume-weighted median of the previous day’s trades. On October 1, 2026, the EFFR was 3.88% on $120 billion of loans. Beside it sits a far larger market in overnight loans secured by Treasuries, whose benchmark, SOFR (Secured Overnight Financing Rate), printed 3.87% the same day on $3.07 trillion of trades; the two rates move together.
A worked example
Trace the Chain — Part 2 Thought Experiments
1. The Fed unexpectedly raises rates 0.75%. Trace: US Treasury yields → global capital flows → the rupee → RBI’s dilemma → Indian IT stocks (whose revenue is in dollars). Which links strengthen and which suffer? 2. The US 2-year yield rises above the 10-year. What is the market forecasting, and which three chapters explain why? 3. If BRICS launched a shared trade currency tomorrow, list the first three obstacles it would face — then check them against chapter 2.6: BRICS and the Challenge to Dollar Dominance.
Under the hood
Under the Hood: Why the Funds Rate Trades Between 3.75% and 3.90%
Fed funds interest is quoted on a 360-day year. Take $100 million lent for one night: Option Rate Interest for one night A bank leaves it at the Fed (IORB) 3.90% $100,000,000 × 0.0390 ÷ 360 = $10,833 A lender places it in fed funds at the EFFR 3.88% $100,000,000 × 0.0388 ÷ 360 = $10,778 A money fund or Federal Home Loan Bank lends it to the Fed (ON RRP) 3.75% $100,000,000 × 0.0375 ÷ 360 = $10,417 A bank will not lend reserves overnight for less than the risk-free $10,833 it earns by leaving them at the Fed, so banks are rarely the lenders.
The Simple Version
The federal funds rate is the interest rate on overnight loans between banks. The Fed does not order anyone to charge it; it pays banks a set rate on the money they keep at the Fed, offers a slightly lower rate to other big cash holders, and lends at a slightly higher one, so the market rate has nowhere to go but in between. Your credit card follows within weeks; your fixed-rate mortgage never does.
When This Breaks: When Reserves Stop Being Ample (September 2019)
The floor system works only while banks hold more reserves than they need. By September 2019 reserves had been falling for years, first as other items on the Fed’s balance sheet grew and then through balance-sheet shrinkage from October 2017 to August 2019. On September 16, corporate tax payments flowed into the Treasury’s account at the Fed and $54 billion of new Treasury debt settled, draining about $120 billion of reserves in two business days.
Recap
The Fed sets the federal funds rate inside a quarter-point target range (3.75–4.00% since September 17, 2026) by paying interest on reserve balances (3.90%) and offering an overnight reverse repo rate (3.75%), with the primary credit and standing repo rates (4.00%) as the ceiling; arbitrage between these administered rates keeps the market rate in the band while reserves are ample.
What the full article covers
The full article includes worked examples, a look under the hood at the mechanics, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume I: Global Economy
Read the full article on FinoLib
The complete article, Federal Funds Rate Explained: How the Fed Sets Interest Rates, with every worked example, diagram, quiz and source, is free to read in Volume I, Global Economy on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance