Federal Discount Rate

0.75 as of 2012-06-15

Federal Discount Rate is usually referred as the interest rate charged to borrow short-term funds directly from a Federal Reserve Bank by an eligible depository institution. It is calculated actually as the interest rate used to determine the present value of future cash flows.

The interest rate being too higher, this type of borrowing from the Federal Reserve Bank is reasonably limited. Financial institutions will often try to seek out other means of meeting short-term liquidity requirements. There are two types of interest rates set by the Federal Reserve bank, one the federal discount interest rate and the other being the overnight lending rate, or the Federal funds rate.

The federal discount interest rate is always higher than the federal funds interest rate, which is the interest that banks charge one another for short-term loans.

How does Federal Discount rate differ from Federal Funds rate?

The federal fund rate is defined as the interest rate that one bank charges other bank when lending money to it. The federal funds rate is fixed by the Federal Reserve. One of the outcomes of having a reserve limit is that sometimes banks, while trying to stay as close to that limit as possible, may go under it and thus need to borrow some money to boost their reserves.

The federal discount rate is the interest rate that the Federal bank charges banks when it lends the money to the bank. Since the federal rate amount is always higher than the Federal Funds Rate, so it is used as a last way out for banks needing some cash to boost up their reserves.

The federal discount rate is of chief importance precisely because it facilitates and controls the availability of cash flow. It is the job of Federal Open Market Committee (FOMC) to maintain the delicate balance in raising or lowering the federal discount rates and by how much. Changes in the federal rates can have a direct impact on the economy. If there is a flow of “too much” money in an economy, rapid growth may occur, but price inflation may also take place, which can hamper economic growth if it gets out of hand. On the other hand, too little money has the effect of stifling otherwise healthy growth or preventing economic recovery in a depression or recession.


Historical Values

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