Federal Funds Rate
The federal funds rate is the interest rate at which US banks lend reserves to each other overnight. The Federal Reserve sets a target range for it, and it serves as the anchor for interest rates across the US economy and much of the world.
How the rate is set
The rate is decided by the Federal Open Market Committee (FOMC), which meets eight times a year. Strictly speaking, the Fed does not fix the rate directly. It announces a target range, for example 4.25% to 4.50%, and steers the actual market rate into that range using tools such as the interest it pays banks on their reserves.
Each decision comes with a statement and, at some meetings, projections of where committee members expect rates to go. Markets study these closely, often more than the decision itself.
How it spreads through markets
Changes in the federal funds rate ripple into mortgage rates, corporate borrowing costs, savings rates and bond yields. Higher rates make safe assets such as cash and government bonds pay more, which reduces the appeal of riskier assets that pay no interest. Lower rates do the opposite and tend to make borrowing cheaper.
Between March 2022 and July 2023, the Fed raised its target range from near zero to 5.25% to 5.50% to fight high inflation. Crypto, like stocks, fell sharply during much of that period, although crypto-specific failures also played a large part.
An example
Say markets expect a rate cut and the Fed holds rates steady instead. Bond yields may rise and the dollar may strengthen within minutes. Riskier assets, including crypto, could fall as investors adjust. If the Fed cuts as expected, there may be little reaction, because the move was already priced in.
Reading Fed decisions sensibly
Crypto prices are influenced by many things, and the link to interest rates is a tendency, not a fixed rule. Volatility often spikes around FOMC announcements and press conferences, so trading with leverage at those moments carries extra risk of liquidation.
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Frequently asked questions
Why does the Fed's interest rate affect Bitcoin?
Interest rates shape how attractive safe assets are compared with risky ones and how cheap borrowing is. Changes in expectations can shift money into or out of assets like Bitcoin.
How often does the Fed decide on rates?
The FOMC holds eight scheduled meetings per year and can also act between meetings in an emergency.
Does a rate cut always make crypto go up?
No. Markets react to the gap between expectations and the decision, and other news can outweigh the rate change itself.
Related terms
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