Discount window and Discount rate

Discount window and Discount rate

Discount window and Discount rate play an essential role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy.


The discount window provides ready access funding, which helps depository institutions manage their liquidity risks efficiently and avoid actions that negatively affect their customers, such as withdrawing credit during times of market stress. Therefore, the discount window is secured loans that support the smooth flow of credit in a country’s economy. Recent changes in discount windows include narrowing the spread of the primary credit rate relative to the general level of overnight interest rates.  The move by the federal reserve board aims to help encourage more active use of the window by depository institutions to meet unexpected funding needs. It means that depository institutions

can now borrow from the discount window for periods of up to 90 days. The loan borrowed from the discount window is pre-payable and renewable by the borrower daily. Following the outbreak of the Covid-19 pandemic, the Federal Reserve lowered its interest rate to 0.25%.

The Federal Reserve Banks offer three types of credit to depository institutions, including seasonal, primary, and secondary credits at different interest rates. The primary credit rate entails the introductory interest rate of 0.25%.1, which is charged to most commercial banks. It is usually charged at a higher interest rate than the interest rate charged on the Federal Reserve funds. Similarly, the secondary credit rate is higher charged 0.75%.1 to commercial banks that do not meet the primary rate requirements. It is typically half a point higher than the primary credit rate. However, the seasonal discount rate is a type of discount window loans offered to small community banks that need a temporary boost in funds to meet local borrowing needs. Such seasonal needs may in

clude loans for students, farmers, resorts, and other seasonal activities in the community.

The Federal Open Market Committee acts as the Fed’s operations manager and meets eight times a year to make crucial decisions on the fed funds rate allowing the central bank to

encourage other banks to lend either more or less.

The Fed’s Board of Governors usually changes the discount rate to remain aligned with the fed funds rate. The Fed raises the discount rate when it wants all interest rates to rise to utilize a tool of the contractionary monetary policy, which is usually is used by the central banks to fight inflation.

The policy controls inflation by controlling economic growth by minimizing the money supply, resulting in slow lending. The opposite is called expansionary monetary policy, and the central banks use it to stimulate growth. As a result, the Federal Reserve utilized the policy to lower the discount rate, which means banks have to lower their interest rates to compete. Besides, the expansionary policies increase the money supply in the economy, promoting lending in efforts toward bossing economic growth.


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