Investopedia says the discount rate is lower than the fed funds rate, and wikipedia says the discount rate is higher than the fed funds rate. Which one is correct? Thanks. From Investopedia: Setting the Discount Rate - This is the interest rate that banks pay on short-term loans from a Federal Reserve Bank. The discount rate is usually lower than the federal funds rate, although they are closely related. The discount rate is important because it is a visible announcement of change in the Fed’s monetary policy and it gives the rest of the market insight into the Fed’s plans. From Wikipedia: Another way banks can borrow funds to keep up their required reserves is by taking a loan from the Federal Reserve itself at the discount window. These loans are subject to audit by the Fed, and the discount rate is usually higher than the federal funds rate. Confusion between these two kinds of loans often leads to confusion between the federal funds rate and the discount rate. Another difference is that while the Fed cannot set an exact federal funds rate, it can set a specific discount rate.
Since 2003, the discount rate is higher. This was an action taken by the Fed in which it set the discount rate to 1% above Fed Funds rate.
Wikipedia is right in the long-term; investopedia is right recently.
thx can someone plz explain what the effect is of setting the discount rate higher than the fed funds rate. why would the fed choose to do this?
The notion is that banks borrowing at the discount window are inviting Fed scrutiny. The only way they would do this is if other banks wouldn’t lend to them. This is Fed encouragement for banks to help themselves, not rely on the Fed.
The fed would rather banks lend to each other than take on the risk itself, except in a lender of last resort scenario.
Is it to encourage institutions to sell there treasuries in open market first before they go to discount window?
You would repo your treasuries instead of borrowing at the discount window.
Why do you look on investopedia/wikipedia…!?! Discount rate has been higher the the fed funds rate in the past few years.
can someone also plz explain why sometimes the fed funds rate trades lower than the target rate. does that signify that banks are more willing to lend to others? thx.
The target rate is “targeted” by open market operations. I the FFR is too low or too high in relation to the target, buying and selling of bonds is used to stay near the target.
thx dreary. but i thought there are cases where the Fed changes the overnight target rate, but the actual rate still stays quite a bit below the overnight rate. or is that not true?