ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The discount rate is the interest rate the Fed charges on loans of reserves to banks. The federal funds rate is the interest rate banks charge for overnight loans of reserves to other banks.

Detailed explanation-2: -The Federal Open Markets Committee (FOMC) sets the federal funds rate-also known as the federal funds target rate or the fed funds rate-to guide overnight lending among U.S. banks. It’s set as a range between an upper and lower limit. The federal funds rate is currently 4.50% to 4.75%.

Detailed explanation-3: -When the Federal Reserve increases the discount rate banks become more cautious and tend to hold extra reserves. Because banks hold extra reserves, this money will not increase through multiple deposit creation and the money supply will decrease.

Detailed explanation-4: -The rates are determined by market conditions, but influenced by the actions of the Federal Reserve’s Open Market Committee, which purchases and sells securities (mainly securities issued by the U.S. government) for its own account, and by changes in the reserves that banks must hold to support their deposits.