Federal Reserve Discount Rate For Borrowing

The Federal Reserve Discount rate is the rate at which the member banks of the Federal Reserve may borrow short term funds directly from a Federal Reserve Bank. The important fact that is associated with this rate is that it is one of the two interest rates set by the Fed, the other being the Federal funds rate. The Fed actually controls this rate directly. The fact, however, is no way related to the policy implementation, as the banks may find different places where their funds may be discounted.

The monetary policy of the Federal Reserve is dependant on the different federal funds rate. This rate is the rate at which the banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is determined by the market and not by the Fed. However, the Federal Reserve makes all efforts, for the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. Federal Reserve Discount rate is also related to these rates.

The Federal Reserve Discount Rate can be described as the interest rate that banks pay to the Fed to borrow directly from them. However, the fact remains that banks usually prefer borrowing fed funds from other banks.This kind of borrowing is even at a higher interest rate, rather than directly from the Fed.The main reason that can be associated with this is that this might address problems related to the solvency or the credit worthiness of the banks.

The Federal Reserve System adjusts the Federal Reserve Discount Rate by 0.25% or 0.50% at a time. As per the statistics in the early part of 2001 to mid 2003 the Federal Reserve lowered its interest rates 13 times, from 6.25 to 1.00%.The main reason of this lowering was to fight recession.A year later in November 2002, rates were cut to 1.75, and many interest rates went below the inflation rate. On June 25, 2003, the federal funds rate was lowered to 1.00%, its lowest nominal rate since July, 1958, when the overnight rate averaged 0.68%.

Towards the end of June 2004, the Federal Reserve System raised the Federal Reserve Discount Rate and then continued to do so for 17 straight times. The rate is 5.25% as of Fed elected, to keep the rate steady after its August 8 meeting following the seventeen straight 0.25% increases.The different rates that were offered by the reserve were also not changed after the September 20, 2006 and October 25, 2006 FOMC meetings. On September 18, 2007, the FOMC unanimously voted to reduce the federal funds rate by 50 basis points (.50%) to 4.75% in response to slowing economic conditions and turmoil in the financial markets that sharply constrained the supply of credit. Federalreserve