| |
The Federal Discount rate is the rate of interest
member banks pay for secured overnight
borrowing. The Federal Discount rate is an
administered rate meaning that the Board of
Directors at each
Federal Reserve Bank set this rate, not the
market. From time to time, member banks find it
necessary to borrow from the Federal Reserve
rather than from each other. When the Federal
Discount rate is high, it costs more to borrow
funds so banks borrow less. With the supply of
money tightened, short-term
interest rates increase and vice versa. That’s
how the Federal Discount rate helps the Federal
government control available funding. |
|
