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.