What is a central bank rate?
The federal funds rate is the rate at which financial institutions can borrow overnight from other depository institutions. These overnight loans are vital for banks because they ensure that the bank has constant access to cash, guaranteeing liquidity in the financial system. However, a higher rate means banks prefer to hold their money, slowing the loans issued and causes a decrease in the money supply. While this slows the economy, it also reduces inflation.
The history of the federal funds rate shows ups and downs that follow the business cycle. When there is a recession, the rate drops, slowly increasing after the economy recovers. In addition to aggressive asset purchase programs, some central banks, including the European Central Bank, introduced negative interest rates. It remains to be seen how the Federal Reserve and other central banks will react to the next crisis.