The federal funds rate is the rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The federal funds rate affects the unemployment rate because it influences the rate at which banks lend money to businesses, which in turn affects how many people businesses can hire. When the federal funds rate is low, it is cheaper for businesses to borrow money, so they can afford to hire more people. When the federal funds rate is high, it is more expensive for businesses to borrow money, so they hire fewer people