What is a Key Rate?
A bank or other institution uses the key rate to determine the interest rate on debt. In the United States, there are two key rates: the discount rate and rate.
How Does a Key Rate Work?
To understand key rates, it is important to understand that banks derivefrom making . When lending generates for banks, they are motivated to lend as much of their as possible. This is a problem when a large number of depositors suddenly want to withdraw their . To prevent the panic that would naturally occur in this situation, the Federal Reserve maintains a fractional reserve banking system, which requires banks to keep a certain percentage of their deposits in .
The Federal Reserve Discount Rate
When a bank is unable to meet the reserve requirement, it can borrow those from another bank or directly from the Federal Reserve. If it borrows from another bank, it can get a ; borrowing from the Federal Reserve involves borrowing from 's "Discount Window" at the Discount Rate. The loans are unsecured and are for very short periods (typically overnight).
When a bank is unable to meet the reserve requirement, it can get a Fed Federal Funds loans are usually made through who specialize in such transactions, or they are made directly between the banks themselves..
Why Does a Key Rate Matter?
Accordingly, the Federal Reserve can trigger a change in the Federal Funds rate by changing the discount rate. This is why the discount rate and the Federal Funds rate are closely correlated key rates.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Practically every zoo has a giraffe, and they all look alike: long neck, tan spots, four legs. Until around 2007, scientists thought there was just one kind of giraffe. But then a team of...Read More →
One of the most interesting elements in the evolution of the ETF marketplace has...Read More →
When it comes to figuring out credit scores, there are very few things that are obvious. Really, I spend a lot of time following this stuff and sometimes...Read More →