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

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

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....
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern