Federal Discount Rate

AAA

DEFINITION of 'Federal Discount Rate'

The interest rate set by the Federal Reserve that is offered to eligible commercial banks or other depository institutions in an attempt to reduce liquidity problems and the pressures of reserve requirements. The discount rate allows the federal reserve to control the supply of money and is used to assure stability in the financial markets.

INVESTOPEDIA EXPLAINS 'Federal Discount Rate'

A decrease in the discount rate makes it cheaper for commercial banks to borrow money, which results in an increase in the supply of money in the economy. Conversely, a raised discount rate will make it more expensive for the banks to borrow, and would thereby decrease the money supply. Funds borrowed from the fed are processed through the discount window and the rate is reviewed every 14 days.

RELATED TERMS
  1. Discount Rate

    The interest rate charged to commercial banks and other depository ...
  2. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  3. Reserve Requirements

    Requirements regarding the amount of funds that banks must hold ...
  4. Discount Window

    Credit facilities in which financial institutions go to borrow ...
  5. Loose Credit

    The practice of making credit easy to come by, either through ...
  6. Liquidity Squeeze

    When concern about the short-term availability of money causes ...
RELATED FAQS
  1. How does the Federal Reserve determine the discount rate?

    There are several different discount rates offered through the Federal Reserve system. Technically, discount rates are set ... Read Full Answer >>
  2. Who determines interest rates?

    In countries using a centralized banking model, interest rates are determined by the central bank. In the first step of ... Read Full Answer >>
  3. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Full Answer >>
Related Articles
  1. Economics

    The Federal Reserve

    Few organizations can move the market like the Federal Reserve. As an investor, it's important to understand exactly what the Fed does and how it influences the economy.
  2. Investing Basics

    How Interest Rates Affect The Stock Market

    Whether you're buying lunch, a home or a stock, you're influenced by interest rates.
  3. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  4. Economics

    What's The Impact On Equities If The Rates Hike?

    The Fed is on course for raising interest rates. True, that leaves the question of when (most likely June or September, but could be later) and how much.
  5. Investing

    Are You Ready To Invest In The Tech Sector?

    Tech stocks, particularly those of mature tech companies, are well positioned and offer meaningful upside potential in the near-term.
  6. Investing

    The Impact Of A Stronger Dollar In The Markets

    The economy continues to improve, but also demonstrated that some areas of the stock market are more vulnerable to an increase in interest rates.
  7. Bonds & Fixed Income

    Does Quantitative Easing Work?

    The US, Japan, and now the EU have embraced quantitative easing. But what works for the economy of one country doesn't necessarily work for another's.
  8. Trading Strategies

    Consider The Season On Trading Day

    Calendar and clock bias, better known as seasonality, is a frequently misunderstood concept that exerts a huge influence on the ticker tape.
  9. Investing

    Reassessing Your Approach To Bond Investing

    Rethinking your fixed-income portfolio may not resonate in quite the same way as dropping 10 pounds or finally giving up that smoking habit.
  10. Economics

    What's the Federal Funds Rate?

    The federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements.

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center