Federal Reserve Credit

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DEFINITION of 'Federal Reserve Credit'

Refers to the process of the Federal Reserve lending funds on a very short-term basis to member banks in order to meet their liquidity and reserve needs. By lending money to member banks, the Federal Reserve helps to maintain the steady flow of funds between consumers and bankings institutions.

Federal Reserve credit is most often extended by way of the "discount window," which is the Federal Reserves primary program of lending funds to member banks. The discount rate at which banks borrow depends on the creditworthiness of each bank, as well as the overall demand for funds at any given time.

INVESTOPEDIA EXPLAINS 'Federal Reserve Credit'

As complicated as the money system can appear, the concept of Federal Reserve credit is surprisingly simple. In essence, the Federal Reserve extends credit as a "swing loan" to get banks through short periods of time when their Federal Reserve requirements could not otherwise be met. It's important however, to not confuse these swing loans with any type of financial bailout. The Federal Reserve's routine procedure of lending to member banks is highly regulated and backed by the collateral of each bank borrowing the money.

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