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: -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: -The discount rate is the rate of interest at which commercial banks pay interest on the funds they borrow from the Fed. If this rate increases, they would look to borrow lesser firms from the Fed. With lesser funds available to them, they also give lesser loans which reduces the money supply.

Detailed explanation-4: -The federal funds rate is the target interest rate set by the FOMC. This is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. The FOMC sets a target federal funds rate eight times a year, based on prevailing economic conditions.