The Secured Overnight Financing Rate and the Federal Funds Rate are both overnight interest rate benchmarks in U.S. dollars, but they measure fundamentally different transactions. SOFR reflects secured borrowing backed by U.S. Treasury securities and carries almost no credit risk. The Federal Funds Rate reflects unsecured lending between banks and carries a sliver of bank credit risk. As of March 2026, the Effective Federal Funds Rate sits at 3.64% and SOFR sits at 3.62%, and that narrow gap is the whole story in miniature: lenders charge slightly more when nothing protects them if the borrower fails.1Federal Reserve Bank of New York. Effective Federal Funds Rate2Federal Reserve Bank of New York. Secured Overnight Financing Rate Data
What Each Rate Measures
The Federal Funds Rate is the interest rate banks charge one another for overnight loans of reserve balances held at the Federal Reserve. No collateral changes hands. The lender relies entirely on the borrower’s creditworthiness to be repaid the next morning. The rate published each day is the Effective Federal Funds Rate (EFFR), calculated as a volume-weighted median of all overnight federal funds trades.3Federal Reserve Bank of New York. Technical Note Concerning the Methodology for Calculating the Effective Federal Funds Rate
SOFR measures the cost of borrowing cash overnight when the borrower pledges U.S. Treasury securities as collateral. In a repurchase agreement, a dealer temporarily sells Treasuries to a lender and buys them back the next day at a slightly higher price; the difference is effectively the interest rate. If the borrower fails, the lender keeps the Treasuries, which is why the credit risk is negligible. The Federal Reserve Bank of New York publishes SOFR each business day at roughly 8:00 a.m. Eastern, drawn from tri-party repo data, general collateral finance transactions, and bilateral Treasury repo cleared through FICC.2Federal Reserve Bank of New York. Secured Overnight Financing Rate Data
The Core Differences That Matter
Collateral and Credit Risk
Every transaction behind SOFR is secured by Treasuries. Every transaction behind the EFFR is unsecured. That single distinction is why SOFR is treated as a near-risk-free rate while the EFFR carries an implicit bank credit component. Federal Reserve research found that compounded SOFR averages have historically run about 2 to 3 basis points below compounded EFFR averages under normal conditions.4The Federal Reserve. Historical Proxies for the Secured Overnight Financing Rate
Market Depth
The gap in transaction volume is not close. The federal funds market handles roughly $100 billion in daily volume.5Federal Reserve Bank of St. Louis. Effective Federal Funds Volume SOFR’s underlying Treasury repo market processes more than $3 trillion daily, with mid-March 2026 volume around $3.1 trillion.2Federal Reserve Bank of New York. Secured Overnight Financing Rate Data A benchmark built on roughly 30 times the transaction data is harder to distort and more representative of actual funding costs across the market.
The Fed’s Role
The two rates also sit in different places in the monetary policy framework. The Federal Open Market Committee sets a target range for the Federal Funds Rate (currently 3.50% to 3.75%) and actively manages the EFFR inside that range using administered tools: the Interest on Reserve Balances rate at 3.65% pulls the EFFR up toward the top of the range, and the Overnight Reverse Repurchase facility at 3.50% keeps it from falling below the bottom.6Federal Reserve Board. Interest on Reserve Balances Frequently Asked Questions7Federal Reserve Bank of New York. Repo and Reverse Repo Agreements
SOFR floats independently based on supply and demand for Treasury collateral. The Fed observes it rather than targeting it. When you read that “the Fed raised rates,” that refers to the federal funds target range, not SOFR. SOFR moves in the same direction because the underlying forces (reserve levels, collateral availability) affect both markets, but the transmission is indirect.
When the Gap Blows Out
Under stress, the small routine spread between the two rates can widen sharply, and it can move in either direction. In a banking crisis, banks become reluctant to lend without collateral, pushing the unsecured federal funds rate higher while SOFR stays comparatively anchored by Treasury collateral. The 2008 financial crisis showed this pattern clearly: unsecured interbank rates spiked while secured lending stayed cheaper.
SOFR has its own vulnerability in the opposite direction. On September 17, 2019, SOFR jumped from roughly 2.2% to over 5% in a single day. The Office of Financial Research traced the disruption to a convergence on September 16: a large Treasury settlement date collided with the corporate tax payment deadline, draining reserves from the banking system from two directions at once.8Office of Financial Research. OFR Identifies Factors That May Have Contributed to the 2019 Spike in Repo Rates The New York Fed injected billions in emergency repo operations to calm the market. Even the safest collateral in the world doesn’t prevent a spike when cash to lend against it suddenly dries up.
Quarter-end and year-end dates create smaller, predictable bumps in SOFR when banks scale back repo lending to clean up their balance sheets for regulatory reporting. The effect is modest but real, and it doesn’t show up in the EFFR the same way. In 2021 the Fed launched the Standing Repo Facility, which offers eligible counterparties overnight cash against Treasuries at a rate set by the FOMC and acts as a pressure valve if repo rates climb.9Federal Reserve Board. Standing Repurchase Agreement Operations
Which Rate Sets Your Loan
Both rates reach ordinary borrowers, but through different products.
The Federal Funds Rate drives the prime rate, the benchmark banks use to price credit cards, home equity lines of credit, and many small business loans. The prime rate tracks the federal funds target with a conventional markup of roughly 3 percentage points; with the target range at 3.50–3.75%, the prime rate in March 2026 is 6.75%.10Federal Reserve Board. H.15 – Selected Interest Rates (Daily) When the FOMC changes the target, the prime rate moves almost immediately, and variable-rate consumer debt reprices within a billing cycle or two. Card issuers have shown a tendency to pass along increases faster than decreases.
SOFR has become the standard index for adjustable-rate mortgages. Freddie Mac requires SOFR-indexed ARMs to use the 30-day compounded SOFR average as their index, with a margin between 1 and 3 percentage points added on top.11Freddie Mac Single-Family. SOFR-Indexed ARMs Private student loan lenders also commonly reference SOFR for variable rates. Business loans and derivatives frequently reference forward-looking Term SOFR rates in 1-, 3-, 6-, and 12-month tenors, published by CME Group from SOFR futures markets; roughly $9.8 trillion in loans referenced Term SOFR by the end of 2024.12CME Group. CME Term SOFR Rates
The practical difference between a prime-based loan and a SOFR-indexed loan is subtle. SOFR is a slightly lower base index because it excludes bank credit risk, but lenders adjust the margin to compensate. What matters for planning is knowing which benchmark drives your loan so you’re watching the right number when rates move. Both ultimately respond to Fed policy, but SOFR can show brief volatility around quarter-end dates that the prime rate does not.
Why SOFR Exists
SOFR is a relatively recent benchmark, and its prominence is a direct consequence of the LIBOR scandal. The London Interbank Offered Rate underpinned an estimated $300 trillion in financial contracts but was based on banks’ self-reported estimates of their borrowing costs rather than actual transactions. During the 2008 crisis the unsecured interbank lending LIBOR was supposed to measure largely evaporated, yet the published rate kept suggesting active, cheap borrowing. Investigations later revealed that traders at multiple global banks had deliberately manipulated submissions to benefit their positions.
The Alternative Reference Rates Committee, convened by the Federal Reserve Board and the New York Fed, unanimously selected SOFR as the preferred replacement for U.S. dollar LIBOR in 2017.13Federal Reserve Bank of New York. Alternative Reference Rates Committee – Transition from LIBOR SOFR addressed each weakness that brought LIBOR down. It’s transaction-based rather than survey-based, drawn from a deep and liquid market, and calculated using transparent methodology published by the New York Fed.14Federal Reserve Bank of New York. How SOFR Works U.S. dollar LIBOR panels ended in June 2023.
The Federal Funds Rate, by contrast, has been the Fed’s primary policy tool for decades and never faced the same integrity problems. The two rates now coexist because they serve different purposes: one is the lever the Fed pulls to steer the economy, and the other is the yardstick markets use to price contracts that need a robust, transaction-based reference. Understanding which is which tells you what a change in either rate actually means for your money.