Federal Funds Rate (Fed Funds Rate)
Direct definition
The federal funds rate is the short-term interest rate the Federal Reserve targets for overnight lending between banks, which indirectly influences broader borrowing costs.
Written by the Vabasso Mortgage Editorial Team · Reviewed against agency and federal sources · Read our editorial policy for how we research and review mortgage content
Plain-English explanation
The Federal Reserve adjusts this rate to manage inflation and economic growth. While it doesn't set mortgage rates directly, changes to it can shift investor expectations and bond yields, which do factor into how mortgage rates move over time.
Why it matters
Borrowers often assume Fed rate changes move mortgage rates in lockstep, but the relationship is indirect — mortgage rates are driven more by mortgage-backed securities and bond markets.
Where you may see it
- Financial news coverage of Fed meetings
- Rate outlook discussions
- ARM index commentary
A real-world example
Educational and illustrative only
A common misunderstanding
The federal funds rate is not the same as, and does not directly set, mortgage interest rates.
Frequently asked
Does a Fed rate cut always lower mortgage rates?+
Not necessarily — mortgage rates respond to broader bond market expectations, which may already reflect an anticipated Fed move.
Ask Vabasso AI
- Author
- Vabasso Mortgage Editorial Team
- Reviewed by
- Vabasso Mortgage Licensed Advisory Team
- Last reviewed
- July 30, 2026