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Money and Financial Markets

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Before January 9, 2003, the Federal Reserve discount rate was set lower than the FOMC’s federal funds rate target for open market operations. The Reserve Banks had to use administrative means to discourage borrowing at this attractive rate. Since that date, the discount rate has been set 100 basis points (bp) above the targeted funds rate and the Reserve Banks no longer have to discourage borrowing administratively. One expected result was reduced variability of the funds rate, which would be capped by the discount rate. If potential lenders were to ask more than that, qualified institutions would turn to the discount window to borrow at the more attractive primary credit rate.

Suggested citation: “Money and Financial Markets,” Federal Reserve Bank of Cleveland, Economic Trends, no. 05-05, pp. 05-07, 05.01.2005.

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