An interest rate is the price of borrowing money, stated as a percent per year. In the United States, the base of that price is set by a committee rather than by a market crowd. The Federal Open Market Committee votes on a target range for one overnight rate. Lenders then price longer loans from that anchor and from their own expectations.
The anchor is documented, not abstract. The Federal Reserve Board’s open market operations table lists every target-range change with its date. The latest entry lifts the range to 3.75 to 4.00 percent on September 17, 2026. A mortgage quote and a small-business loan both carry that base inside them.
What rate does the Federal Reserve actually set
One short-term rate: the federal funds rate. The Federal Reserve describes it as the rate at which depository institutions lend reserve balances to each other overnight, around a target that the Federal Open Market Committee establishes. The committee does not set the rate on a car loan or a savings account. It sets the target for the market where banks price the shortest credit there is.
The open market operations table also records direction, and the direction changes. It shows three cuts during 2025, from 4.00 to 4.25 percent down to 3.50 to 3.75 percent by December. It then shows an increase of 25 basis points on September 17, 2026, back to 3.75 to 4.00 percent. Policy moves both ways, and every move is dated on one page.
How do interest rates work through the rest of the economy
Anyone searching how do interest rates work is really tracing one chain of pricing. The overnight rate anchors what it costs banks to hold and lend reserves. Banks set loan prices above their own funding costs, and those costs shift when the target range shifts. Deposit pricing works the same way in reverse, because a savings offer is priced off what a bank pays for funds.
Two limits keep the story honest. The Federal Reserve sets a target range, not the exact rate, and the funds rate itself trades inside it. Banks also price term and credit risk on top of funding costs, which is why two borrowers with the same base can see different offers.
Why the mortgage quote sits far above the policy rate
The gap is wide, and both sides of it are measured. Freddie Mac’s Primary Mortgage Market Survey put the 30-year fixed-rate mortgage at an average of 7.40 percent as of October 15, 2026, unchanged from the week before. The policy range topped out at 4.00 percent. A 30-year mortgage is a long-term contract, so lenders price years of expected funding costs, not one overnight rate. Readers following this should also see Where programmatic ad money actually goes before publishers get paid.
The survey also shows the two rates do not move in lockstep. A year earlier, with the policy range at 4.00 to 4.25 percent, the same 30-year average stood at 6.27 percent. Since then the policy rate fell while the mortgage average rose to 7.40 percent. The survey has run since April 1971, and it samples actual loan applications rather than advertised offers.
What the rulebook caps for small-business loans
For federally backed small-business credit, the spread is written down. The Small Business Administration caps what lenders may charge on its 7(a) loans as a spread over a base rate, and the cap shrinks as the loan grows. Loans of 350,000 dollars and above carry a cap of base rate plus 3.0 percent. Loans of 50,000 dollars or less carry a cap of base rate plus 6.5 percent.
The SBA program page lists the full grid, including the middle bands at 6.0 and 4.5 percent. A cap of this kind does two things. It makes the markup legible before signing, and it ties the final number to the same base the Federal Reserve moves.
Conclusion: the policy rate is an anchor, not a price tag
Three documents frame the whole system. The Federal Reserve’s table dates every change to the target range, now 3.75 to 4.00 percent. Freddie Mac’s survey shows the 30-year mortgage at 7.40 percent, far above that anchor and moving on its own clock. The SBA grid shows spreads made public before signing. Interest rates work as a chain of prices, and each link in that chain leaves a written record. This connects to our earlier piece, What is gdp — GDP explained: what the number measures, and what it quietly leaves out.
