Federal Discount Rate – What is it?
July 23rd, 2007 by John Thomas
The Federal Discount Rate is the interest rate charged by a Federal Reserve Bank to its eligible member banks and financial institutions when they need to borrow funds directly from the Federal Reserve. Banks whose reserves fall below the reserve requirement set by the Federal Reserve’s Board of Governors use that money to correct their shortage. The board of directors of each Reserve Bank sets the Discount Rate every 14 days. Borrowing from the Federal Reserve is generally considered a last resort option for banks, which usually borrow from each other.
The Fed uses the Discount Rate to control the supply of available funds, which in turn influences inflation and overall interest rates. The more money available, the more likely inflation will occur. Raising the Discount Rate makes it more expensive to borrow from the Fed and this lowers the supply of available money, which increases the short-term interest rates. Lowering the Discount Rate has the opposite effect, bringing short-term interest rates down.
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