The rate that gets decided
Eight times a year, the Federal Open Market Committee — the seven governors, the New York Fed president, and four other regional presidents on rotation — votes on a target range for the federal funds rate, the rate banks charge each other for overnight loans of reserves. The range is a quarter point wide ("5.25%–5.50%" style). That single overnight rate is the anchor for nearly everything else: banks price their prime rate a fixed spread above it, money markets track it, and expectations about its future path shape longer rates like mortgages and corporate bonds.
How the target becomes reality
Before 2008, the Fed hit its target by adjusting the scarcity of reserves through daily open market operations. That world is gone. Since the crisis-era expansion of the balance sheet, banks hold abundant reserves, so scarcity can't set the price. Instead the Fed uses an "ample reserves" framework built on two administered rates. Interest on reserve balances (IORB) is what the Fed itself pays banks on reserves — no bank will lend overnight below what it can earn risk-free at the Fed, so IORB acts as a magnet just under the top of the range. The overnight reverse repo facility (ON RRP) extends a similar floor to money market funds and other non-banks that can't earn IORB. Move those two administered rates, and the whole overnight market moves with them — no open market operations required.
What about the discount rate and reserve requirements?
The discount rate — what the Fed charges banks that borrow from it directly — still exists but is a backstop, set above the target range and carrying a whiff of stigma. Reserve requirements, the textbook favorite, were cut to zero in March 2020 and no longer play any role in U.S. policy. If your mental model of the Fed involves banks scrambling to meet reserve ratios, it's a generation out of date; the modern mechanism is administered rates on an ample supply of reserves.
From the overnight rate to the real economy
Transmission takes time and works through several channels at once: borrowing costs for households and firms, the exchange rate, asset prices, and bank lending standards. The famous rule of thumb is that policy acts with "long and variable lags" — often estimated at a year or more to reach inflation. That lag is why the FOMC is always arguing about the forecast, not the present. Rate policy also interacts with the size of the balance sheet, covered in the QE explainer — the rate is the price of money, the balance sheet is closer to its quantity.
Related reading
Quantitative Easing and Tightening, Explained · The Fed's Balance Sheet, Explained · How Money Is Created