Setting the Discount Rate
An independently determined discount rate seems irrelevant as long as open market operations implement monetary policy. This suggests moving the discount rate frequently in alignment with market rates. Instead, however, the Federal Reserve could use the discount rate as an independent tool to enrich the policy process. In so doing, the central bank could improve the reliability of short-term policy information available to the public and prevent market activity based on faulty assumptions about policy intentions.
The views authors express in Economic Commentary are theirs and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. The series editor is Tasia Hane. This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. This paper and its data are subject to revision; please visit clevelandfed.org for updates.