What is a Federal Discount Rate?
Whenever money is borrowed, it is subject to a rate of interest. Banks often lend money to each other, and the interest rate they charge is set by the Federal Reserve, which is the central bank for the United States. When commercial banks borrow directly from the Federal Reserve, the interest rate that is charged is known as the federal discount rate. It is the subject of much attention from economists and investors as both an indicator and a predictor of economic conditions. The federal discount rate is higher than the federal funds rate, which is the interest that banks charge one another for short-term loans. The federal funds rate is also set by the Federal Reserve, but is not to be confused with the discount rate. Banks are required to have a certain amount of their total deposits on reserve as cash. When a bank gets below this required percentage, it will borrow overnight from other banks, or from the Federal Reserve as a last resort. When we hear in the news that the Federal Res
