Discount Rate of Fed

The Federal Reserve discount rate is how much the Fed charges its member banks (there are twelve regional Federal Reserve Banks across the country, as well as private member banks). In an economic sense, the discount rate is used to control overall interest rates (they get passed onto you as a consumer) and inflation (also passed onto you as a consumer). When you hear on the news about the Fed tinkering with interest rates as the economy is doing well/poorly, they’re talking about the discount rate.

Why would these member banks be borrowing from the Federal Reserve in the first place? They do all the time, actually, since they need to always meet their reserve requirements: legal requirements for how much money a bank needs to have on hand. Banks have a zillion things going on with money going all directions at once, with lots of investing where they can, so it’s not uncommon for the balance to be...off. Banks will often borrow from each other, but the Fed is always there if they need to borrow from it.

By making it more or less expensive to borrow money, the discount rate set by the Fed has ripple effects into the consumer market, the business market, and inflation (which oftentimes counterbalances unemployment). The discount rate is one domino that ends up affecting a lot of other dominos, including yours.