The Federal Reserve concluded its third meeting of the year by maintaining the federal funds rate at 3.50%–3.75%. The decision, which markets had fully priced in, keeps the benchmark rate at its lowest level since November 2022 for the third meeting in a row.
Here is a statement from the meeting:
Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months. Inflation is elevated, in part reflecting the recent increase in global energy prices.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Philip N. Jefferson; Anna Paulson; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting; and Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time.
Background on the Federal Funds Rate (FFR)
The federal funds rate is the interest rate that banks charge each other to borrow money overnight. It is set by the Federal Open Market Committee (FOMC), a committee within the Federal Reserve, which meets eight times a year. It is a primary tool used by the Federal Reserve to implement monetary policy and is a key driver of economic activity.
While it directly affects short-term borrowing between banks, the effects of the FFR can be felt across a variety of entities. For consumers, changes in the FFR influence mortgage rates, credit card interest, auto loans, and saving yields. For businesses it affects borrowing costs and investment decisions. Additionally, financial markets also react to rate changes, with shifts in bond yields and equity performance.
The FOMC adjusts interest rates based on key economic indicators focusing on inflation, employment, economic growth, and income. The Fed has a dual mandate of price stability and maximum employment.
It's easy to see in the chart above how the FOMC's comments from their press release are ringing true. The unemployment rate has moved between 4.3%-4.5% over the past nine months. Meanwhile, inflation has proven sticky over the past few years, with the most recent figures for both Consumer Price Index (CPI) and PCE Price Index still well above the Fed's 2% target level.
Historical Trends of the Federal Funds Rate (FFR)
The stagflation crisis of the late 1970s and early 1980s demanded drastic measures. Under the leadership of Paul Volcker, the Federal Reserve pushed the FFR to a historic high of 20.06% in January 1981. This aggressive tightening of monetary policy was instrumental in curbing runaway inflation, albeit at the cost of a significant economic slowdown.
In stark contrast, the FFR was driven to near-zero levels in the aftermath of the 2008 financial crisis and again during the economic turmoil of the 2020 pandemic. Specifically, the FFR reached a record low of approximately 0.04% in May 2020. These periods of ultra-low interest rates aimed to stimulate borrowing, investment, and economic recovery.
The federal funds rate has undergone significant fluctuations in the past two decades. Following the 2008 financial crisis, the Fed kept rates near zero until 2016. A gradual tightening cycle brought the rate to 2.25%-2.50% by 2019, but the onset of the COVID-19 pandemic led to a return to near-zero rates in 2020.
In response to soaring inflation—the highest in four decades—the Fed aggressively raised rates from March 2022 to August 2023, reaching a peak of 5.25%-5.50%, the highest level since early 2001. The central bank then shifted course in September 2024, implementing three consecutive rate cuts to bring the FFR to the range of 4.25%-4.50%. The Fed went on a similar path in 2025, holding rates steady until September where they then issued three consecutive cuts to bring the FFR to its current range of 3.50%-3.75%.
Federal Funds Rate: What's Next?
The CMEFedWatch Tool estimates the probability of future interest rate moves. The tool is updated in real-time in response to economic data releases, Fed statements, and market movements. The chart below shows the tool’s predictions through the end of 2027. (Note: the chart below is at the time of writing and expectations may have shifted since publication.)
The market is currently pricing in zero rate movements for 2026 and one 25 basis point cut in December 2027.
Once a quarter the Fed releases their "dot plot" to reveal each FOMC member's individual projection for the target level of the federal funds rate (FFR) at the end of the current year, at the end of the next two years, and in the "longer run". The latest "dot plot" from March 2026 reveals a committee that has grown more unified in the near term while simultaneously raising its expectations for where rates will eventually settle. Most participants now anticipate the federal funds rate will hold between 3.25% and 3.75% through the end of 2026, showing a much tighter consensus than previous projections. However, this clarity dissolves in the later years, with 2027 and 2028 showing a wide divergence of opinions ranging from 2.375% to nearly 4.0%. Notably, the "longer run" anchor has shifted upward to 3.0%, signaling a collective belief that the neutral rate is higher than previously estimated.
The Fed’s next meeting is scheduled for June 16-17th where the next "dot plot" will also be released.
Explore the relationship between the Fed Funds Rate and the 10-year Treasury yield in the video below.
