Discount Rate
The interest rate the Federal Reserve charges commercial banks for direct short-term borrowing from the Fed's discount window.
The discount rate is the rate at which banks can borrow directly from the Federal Reserve's discount window as a lender of last resort. It is distinct from — and typically set above — the fed funds rate.
The Fed operates three discount window programs: the Primary Credit rate (overnight lending to healthy banks, typically fed funds + 50bp), Secondary Credit (higher rate for banks in weaker condition), and Seasonal Credit.
Heavy discount window usage signals banks are under stress and cannot access market funding — it is a real-time indicator of liquidity stress in the financial system. During crises (2008, COVID), discount window borrowing surges dramatically.
Related Terms
Federal Funds Rate
The overnight interest rate at which U.S. banks lend reserve balances to each other — the primary policy rate the Fed targets to steer the economy.
IntermediateFOMC
The Federal Open Market Committee — the Fed body that sets U.S. monetary policy, meeting eight times per year to vote on the federal funds rate target.
Intermediate