How does the Federal Reserve's set discount rate affect my personal finances?
The set discount rate of the Federal Reserve Bank affects personal finance by being the determining factor of all other interest rates that individual banks extend to other businesses or individuals.
The Federal Reserve is possibly the world’s single most powerful financial institution. Created by the Congress of the United States in 1913, the Federal Reserve was aimed at ensuring a secure, adjustable and resolute monetary and financial system. The Federal Reserve is an independent body, as the decisions it makes are not required to be approved by any official government personnel, including the president. It must, however, work inside the guidelines established for it by congress.
The Federal Reserve uses monetary policy to affect credit price, ultimately a way to push the Fed's conception of the proper goals of the national economy. This policy filters down through major banks and branches, as well as standalone banks and credit unions, all of which affect individuals and their personal finances. Using three of the monetary policy’s tools – open market operations, the discount rate and reserve requirements – the Federal Reserve can affect the supply and demand capital totals at commercial banks. Depending on the discount rate offered by the Federal Reserve, banks may be encouraged or discouraged in regard to borrowing funds from the Fed that they then have available to lend to companies and individuals. The higher the discount rate is for the bank, the higher the rate of interest charged to individuals using any given bank. A tactic known as moral suasion is often used by the Federal Reserve to force individual banks to adhere to policy, typically pushing them into borrowing funds at higher rates.
Whatever discount rate is established by the Federal Reserve affects every financing aspect of people's lives, including what mortgage rates they pay, interest on credit cards and other personal debt, and interest rates on financing vehicle purchases. In turn, the rates they receive on investments, such as certificates of deposit (CDs), are also ultimately determined by the Fed's discount rate.