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The cost of borrowing money or the return earned on lending money, expressed as a percentage of the principal per year.
Interest rates are the most powerful force in financial markets, affecting everything from mortgage payments to stock valuations. The Federal Reserve sets the federal funds rate, which influences all other rates in the economy. When rates are low, borrowing is cheap, stimulating business investment and consumer spending. When rates are high, borrowing is expensive, cooling the economy. The relationship between interest rates and bond prices is inverse: when rates rise, existing bond prices fall (because new bonds offer better yields). Interest rates also directly affect stock valuations through the discount rate used in present-value calculations.