What is a federal discount rate?
whenever money is borrowed, it is subject to interest rate. Banks give each other the money and the interest rate they charge is determined by the federal reserve system, which is the central bank for the United States. If commercial banks borrow directly from the federal reserve system, the interest rate charged is called a federal discount rate. It is the subject of great attention to economists and investors as an indicator and a predictor of economic conditions.
Federal discount rate is higher than the rate of federal funds, which is interest that banks charge each other for short -term loans. The rate of federal funds is also determined by a federal reserve, but must not be confused with a discount rate. Banks are obliged to have a certain amount of their total deposits on the reserve as cash. When the bank reaches this percentage required, it will borrow overnight from other banks or from the federal reserve system as the last option.
When we hear in the news that the federal reserve system called “FeD ', increased or reduced interest rates, federal discount rate is one of these rates. If interest rates, including federal discount rates, are facilitated and cheaper for banks to get the money needed to meet their reserve requirements. If interest rates are increased for banks. It is reflected in the interest that bank customers pay for loans.
For example, it is easy to notice that the interest rates of mortgages increase or gradually increase with the federal discount rate. Interest rates on the certificate of deposit and savings accounts also fluctuate in the general direction of the discount rate. From a practical point of view, high and low interest rates are translated into a shortage or availability of money in the economy.
Federal discount rate is so important precisely because it controls the availability of money. If there is "too much" money in the economy, there may be a quickGrowth, but there will also be prices inflation, which may shortening economic growth if it gets out of hand. On the other hand, too little money results in suppression of otherwise healthy growth or preventing economic recovery in depression or recession. Maintaining this gentle balance is the task of the Federal Committee on the Open Market, which decides to increase or reduce the federal discount rate, and depending on how much.