DEFINITION of 'Key Rate'

The specific interest rate that determines bank lending rates and the cost of credit for borrowers. The two key interest rates in the United States are the discount rate and the Federal Funds rate.

BREAKING DOWN 'Key Rate'

The key rates are one of the chief tools used by the Federal Reserve system to implement monetary policy. When the Fed wants to expand the money supply, it will typically lower one or both key rates in order to decrease the cost of borrowing. When the Fed is in a contractionary phase, it will raise the rates to increase the cost of borrowing.

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RELATED FAQS
  1. What are the most important interest rates?

    Learn about the most important interest rates in the economy; the Federal funds rate and discount rate are set by the Federal ... Read Answer >>
  2. What's the difference between the prime rate and the discount rate?

    Learn more about the prime rate and the discount rate and how the Federal Reserve uses these rates in the U.S. economy. Explore ... Read Answer >>
  3. How does a high discount rate affect the economy?

    Find out what would happen if the Federal Reserve decided to set a very high discount rate, the rate at which banks can borrow ... Read Answer >>
  4. What are the implications of a low Federal Funds Rate?

    Find out what a low federal funds rate means for the economy. Discover the effects of monetary policy and how it can impact ... Read Answer >>
  5. What impact does the Federal Reserve have on a bank's profitability?

    Learn how the Federal Reserve impacts a bank's profitability with its influence on the discount rate, federal funds rate ... Read Answer >>
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