Chapter 15: Monetary Policy
15-30 The Discount Rate
How the Fed controls Ms
Tools of Monetary Policy
Open-market Operations
Changing the reserve ratio
Changing the discount rate
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The Discount Rate
The interest rate the Fed charges on
loans to member banks.
A loan from the Fed increases
excess reserves and therefore the
lending ability of the bank.
Raising the discount rate, increases
the cost of borrowing, and makes
banks more conservative in lending.
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The Discount Rate
A weak monetary tool.
» Depends on the commercial banks
willingness to borrow from the Fed.
» Banks have other sources of
temporary funds.
– Interbank loans
– Sell bonds
Mostly “announcement effect”
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Chapter 15: Monetary Policy
15-30 The Discount Rate
Interest Rates
Fed Controlled
Discount Rate
Market Determined
Federal Funds Rate
Prime Rate
30 year fixed rate
mortgage
1 year ARM
Car Loan
Credit Card Rate
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Different i-rates.
Discount rate - what the Fed charges
member banks for loans.
Federal funds rate - what banks
charge each other for overnight
loans.
Prime rate - the rate banks charge
their most credit worthy customers.
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Chapter 15: Monetary Policy
15-30 The Discount Rate
S. Reineck Diana
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S. Reineck Diana
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Interest Rates
Fed Controlled
Discount Rate
S. Reineck Diana
Market Determined
Federal Funds Rate
Prime Rate
30 year fixed rate
mortgage
1 year ARM
Car Loan
Credit Card Rate
9
Chapter 15: Monetary Policy
15-30 The Discount Rate
How the Fed controls Ms
Tools of Monetary Policy
Open-market Operations
Changing the reserve ratio
Changing the discount rate
S. Reineck Diana
10
Monetary Policy Outline
What is money?
What is the structure of the banking
system?
How do banks create money?
How does the Fed control the money
creation process?
How does controlling the money
supply (Ms) affect the economy.
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