The federal funds rate is an interest rate that banks charge each other to borrow and lend money. Who sets this rate? The Federal Open Market Committee, which is a decision-making body of the Federal Reserve System. They meet eight times a year to set the federal funds rate.
Example: When the federal funds rate drops, banks can borrow money at a lower interest rate. This is great for you! When they borrow at lower rates, banks are able to pass on these savings to consumers when giving out mortgage loans and lines of credit.
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