Annual Fed funds effective rate in the U.S. 1990-2023

The federal funds rate in the United States increased to its highest point in 2023 since the global financial crisis in 2007/2008. As of December 2023, the rate stood at 5.33 percent. The federal funds rate is the interest rate of the Federal Reserve, the central bank in the United States. It is an essential financial indicator, and analysts all over the world watch this rate. 

What is a central bank rate?

The federal funds rate is the rate at which financial institutions can borrow overnight from other depository institutions. These overnight loans are vital for banks because they ensure that the bank has constant access to cash, guaranteeing liquidity in the financial system. However, a higher rate means banks prefer to hold their money, slowing the loans issued and causes a decrease in the money supply. While this slows the economy, it also reduces inflation.

Historic perspective

The history of the federal funds rate shows ups and downs that follow the business cycle. When there is a recession, the rate drops, slowly increasing after the economy recovers. In addition to aggressive asset purchase programs, some central banks, including the European Central Bank, introduced negative interest rates.