Federal Discount Rate

The federal discount rate is the interest rate that other banks must pay to borrow money from the Federal Reserve bank. Like, they might pay $9.99 billion to borrow $10 billion for a month. That calculation is the discount to par, or rate at which the Fed is discounting future payments so that a market "happens" and it can borrow dough. The federal discount rate affects the money supply, which affects banks and the overall market.

Someone's always borrowing from the Fed, so even if your bank isn’t borrowing from the Fed, it’s most certainly borrowing from another bank that is, or that bank is borrowing from another bank that is. The federal discount rate has a ripple-effect, affecting how much banks charge to lend to each other, as well as how much interest banks charge to consumers for borrowing money in the form of credit cards, personal loans, auto loans, mortgages, etc.

The federal discount rate is one of the main ways the Fed influences the money supply (monetary policy). The lower interest rates are, the cheaper it is to borrow money, and the more borrowing is likely to occur, which boosts the economy like Botox boosts faces. Raising the discount rate makes it more expensive to borrow, which makes Americans cool their jets on the spending.

See: Discount Rate. See: Mortgage.