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my bullets - fund rate was lowered than discount rate(Wiki...

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Graph the federal funds rate and the discount rate since 1997 – your graph should look something like this: Describe the recent change (2003) in the discount rate policy. Referring to your reserve market diagram above, explain how the discount rate currently acts as ‘a lid’ or ‘ceiling’ for the federal funds rate. The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility, the discount window. (Monetary Policy, Federal Reserve Bank) The Federal fund rate is the interest rate charged by private depository institutions on loans they receive from other depository institutions, usually overnight. The federal fund rate remained higher than discount rate until 2003. In 2003 the Federal
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Unformatted text preview: fund rate was lowered than discount rate. (Wiki, 2008) FOMC’s introduced a new kind of discount window, called primary credit, which was similar to the discount window as before but had higher interest rate than federal fund rate and was given for short term, as a backup for liquidity. The FOMC’s target federal fund rate remained unchanged. (Press Release, Federal Reserve Bank, October 31, 2002) The Discount rate currently acts as ‘ceiling’ for the federal fund rate firstly because it has eliminated the incentive for institutions to borrow money at lower interest rate and lending it at higher rates. Secondly, now due to higher discount rates (primary credit) institutions go to Fed’s discount window only when they are actually in trouble, not for incentives....
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