Key Rate
Candlefocus EditorThe Federal Reserve sets the Federal Funds Rate and the Discount Rate, which are two types of key rates. The Federal Funds Rate is the rate that banks charge one another for overnight loans made from their reserves. The Discount Rate is the rate that banks pay to borrow from the Federal Reserve. The Federal Funds Rate and the Discount Rate are both key factors in determining the cost of borrowing.
If the Federal Reserve increases the Federal Funds Rate or the Discount Rate, then it will become more expensive for banks to borrow money, and consequently, lending rates will go up. Inversely, if the Federal Reserve lowers the Federal Funds Rate or the Discount Rate, then it will become less expensive for banks to borrow money and consequently, lending rates will go down.
The Federal Reserve uses the Federal Funds Rate and the Discount Rate to influence the level of economic activity in the U.S. economy, to combat inflation, and to stimulate economic growth. For example, if the Federal Reserve wanted to increase economic activity, they might lower the Federal Funds Rate, making it cheaper for banks to borrow money and triggering more lending, resulting in increased economic activity.
The key rate is an important tool used by the Federal Reserve to help manage the economy. By setting the Federal Funds Rate and the Discount Rate, the Federal Reserve can influence the cost of borrowing, either stimulating or restraining economic activity. By doing so, the Federal Reserve can help foster economic growth, stability, and low inflation.