The Fed's Fight for Control of Its Key Interest Rate

If a ship crossing a wide and placid harbor yaws so far that it almost hits the channel markers, its captain might want to have the rudder adjusted. That’s what the Federal Reserve is attempting to do as the fed funds rate inches closer to the top of the central bank’s target range. Yet even after an unprecedented change to one of its key policy-setting tools in June, the gap between the fed funds rate and the upper bound of the range continues to narrow, and is once again at its smallest in almost eight years. That potentially sets the stage for further adjustments in the months ahead as policy makers look to tighten control over what is arguably the most important interest rate in the world.

In December 2015, the Fed responded to improving economic conditions by raising interest rates that it had cut to near zero during the financial crisis. It set a target range for the fed funds rate of 0.25 percent to 0.5 percent. Since then it’s increased the range another seven times, to 2 percent to 2.25 percent currently. For most of that time, the effective fed funds rate -- the average of what borrowers in the market actually paid -- rested comfortably near the range’s midpoint, just like it’s supposed to. But since the beginning of the year, fed funds has been creeping higher, now sitting just five basis points below the top of the range, at 2.20 percent.