ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The federal discount rate is the interest rate the Federal Reserve (Fed) charges banks to borrow funds from a Federal Reserve bank. The Fed discount rate is set by the Fed’s board of governors, and can be adjusted up or down as a tool of monetary policy.

Detailed explanation-2: -How it’s used: The Fed uses the discount rate to control the supply of available funds, which in turn influences inflation and overall interest rates. The more money available, the more likely inflation will occur. Raising the rate makes it more expensive to borrow from the Fed.

Detailed explanation-3: -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-4: -A Fed rate increase can slow the economy by pushing up borrowing rates and raising the annual percentage rate on savings. If rates rise, it becomes more costly to borrow money. When the Fed boosts its lending rate, consumers and businesses can see increased costs for borrowing, which can discourage spending.

Detailed explanation-5: -If the Fed decreases the discount rate (interest rates), more banks will take out loans and the overall money supply will increase. If the Fed increases the discount rate (interest rates), less banks will take out loans and the overall money supply will decrease.