The Federal Open Market Committee (FOMC) meets eight times a year to determine the federal funds target rate. (1) The rate that the borrowing institution pays to the lending institution is determined between the two banks the weighted average rate for all of these types of negotiations is called the effective federal funds rate.(2) The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target.(2) In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight.

For additional historical federal funds rate data, please see Daily Federal Funds Rate from 1928-1954.

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