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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.

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