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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