Start Investing

What's the overnight rate?

Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

Overnight rate might sound like the five-dollars-more alternative to the hourly rate for the least reputable hotel in town, but in fact it’s a number that has a profound effect on a country’s entire economy. The overnight rate — also called the federal funds target rate — is the interest rate banks charge one another to borrow money in order to maintain federally mandated cash reserve requirements.

The importance of this money to the economy can’t be overstated; it’s the gasoline that fuels the economy’s engine. Unlike, say, mortgage rates, banks have absolutely no control of the overnight rate. It’s dictated by the Federal Reserve’s Federal Open Market Committee, the twelve-member body that meets every six weeks and decides if it wants to raise, lower, or keep unchanged the rate. (Whenever you hear breathless speculation in financial circles about whether the Fed will raise or lower interest rates, it’s shorthand for this process.) Any change in the overnight rate will have seismic effects on the economy. A lowering of the rate, undertaken in order to goose a sluggish economy, frees up the spigot of money by making interest rates in all manner of loans cheaper. Businesses expand, homebuyers buy, and stock markets generally rise.

Conversely, a rate hike — which turns down the flow of money through the economy to prevent inflation — generally slows things down, and depresses the stock prices of most publicly traded companies. Banks, who can rake in more revenue through higher interest on loans, are one of the few exceptions.

Last Updated March 6, 2018

Wealthsimple is investing on autopilot.