Federal Reserve Discount Rate

The Federal Reserve discount rate is the interest rate charged by the Federal Reserve (the Fed) when commercial banks and other depository institutions borrow short-term or “overnight” funds from their regional Federal Reserve Bank’s lending facility (a.k.a. the discount window). The Federal Reserve discount rate is set by the boards of directors of each Federal Reserve Bank. Federal Reserve discount rate changes also are subject to review by the Board of Governors of the Federal Reserve System. The Federal Reserve discount rate is one of two key interest rates set by the Fed. In addition to the Federal Reserve discount rate, the Fed also sets the federal funds rate. Typically, only the larger banks borrow directly from the Federal Reserve at the lower Federal Reserve discount rate and then lend to smaller banks. Changes in the Federal Reserve discount rate (and the fed funds rate) are typically designed “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates,” as stipulated by the Federal Reserve Act. Lowering the Federal Reserve discount rate tends to stimulate the economy but may encourage inflation. Increasing the Federal Reserve discount rate tends to lower inflation by slowing the economy.

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