The term discount rate refers to the rate of interest charged commercial banks when they borrow funds at the discount window. There are three discount window programs offered to depository institutions.
The discount rate is one of the three tools used by the Federal Reserve to achieve its monetary policy goals. As is the case with the reserve requirements, and open market operations (OMO), the discount rate can be used to control the money supply. The discount rate is the rate of interest charged for short-term loans made by the twelve Reserve Banks to commercial banks. It is also one of the tools the Federal Reserve can use to control the money supply.
Lowering the discount rate will encourage additional lending by commercial banks and supports an expansionary monetary policy, while increasing the discount rate makes it more expensive to borrow money and supports a contractionary policy. The Board of Governors sets the discount rate. There are three different discount lending programs:
Each of these programs has a unique rate of interest charged on loans. Unlike fed funds, loans made through the discount window are consider secured loans.