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Federal funds target range

The 25 basis point band the FOMC sets for the overnight fed funds rate; since 2008 policy is announced as a range rather than a single point.

Before 2008 the Fed announced a single target and hit it by adding or draining reserves. In an ample-reserves world it announces a range instead and steers the market rate inside it using administered rates: iorb near the top and the overnight-reverse-repo-facility rate at the bottom.

Everything at the front of the curve is priced off the expected path of this range. fed-funds-futures and ois quote it directly, and a "hike" or a "cut" means moving the whole band by 25 basis points, occasionally 50 or 75.

Example: the range is 4.25 to 4.50%, IORB is 4.40%, the ON RRP rate is 4.25%, and effr prints 4.33%. A 25 basis point rate-cut moves the band to 4.00 to 4.25% and EFFR should settle near 4.08%.

Related: federal-reserve, fomc, effr, iorb, rate-cut

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

A range beside a trendOne chart swinging between a flat floor and ceiling, another stepping upwards inside a pair of sloping lines.Range-boundresistancesupportprice bounces between two levelsTrendingthe trend channelhigher highs and higher lowsA range has two flat edges; a trend has two sloping ones.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.

Educational only, not advice. Spotted an error? Post in Site Feedback.