Next video:
Loading the player...

The Federal discount rate is the amount of interest a central bank charges private banks for short-term loans.

Banks will often borrow from each other for short-term needs, with central banks like the U.S. Federal Reserve typically acting as a “lender of last resort.” As a result, it likes to keep its discount rate somewhere above what private banks are charging each other.

During a recessionary period, however, the Fed may lower the discount rate to boost the money supply, thereby making it cheaper for commercial banks to borrow money, which helps stabilize the broader economy. It may also change other policies to encourage direct borrowing, such as extending the term on loans.

  1. No results found.
Related Articles
  1. Personal Finance

    Explaining the Federal Discount Rate

    The federal discount rate is the rate at which eligible banks or other depository institutions can borrow funds from a Federal Reserve bank.
  2. Personal Finance

    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.
  3. Insights

    Understanding the Bank Rate

    Bank rate is a term describing the interest rate a country’s central bank charges its domestic banks on loans it makes to them.
  4. Insights

    How the Fed Profits From Quantitative Easing

    Central Banks including the U.S. Federal Reserve are making rich profits from stimulative measures such as Quantitative Easing (QE).
  5. Insights

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  6. Personal Finance

    How Banks Set Interest Rates on Your Loans

    Many factors go into how banks set interest rates for loans. Use this information to negotiate the best possible rate when you're borrowing.
  7. Investing

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  8. Trading

    How Do Central Banks Inject Money Into The Economy?

    Central banks inject money into the banking system, and remove money from it, through monetary policy actions.
  9. Trading

    How The Federal Reserve Manages Money Supply

    The Fed's three main tools are manipulating reserve requirements, changing the discount rate, and open-market operations.
  10. Personal Finance

    What Does a Central Bank Do?

    A central bank oversees a nation’s monetary system.
Trading Center