Here's a review of the changes in the discount rate, and the implications for investors.
The Federal Reserve Act of
1913, modified by the banking
acts of 1933 and 1935, created
the Federal Reserve System,
the central bank of the United
States. The responsibilities of
the Fed, as it is commonly
known, falls into four categories.
The Fed supervises and
regulates the banks to ensure
the safety and financial soundness
of the countryís banking system. It maintains the stability
of the financial system and contains any systematic risk
that may arise in the financial markets. It provides financial
services to the US government, financial institutions, foreign
official institutions and the public, including playing a major
role in the foreign exchange markets. The Fed also conducts
the nationís monetary policy by effecting the money and
credit conditions in the economy.
That last responsibility is implemented in numerous ways.
One way is to regulate the growth of the economy by
adjusting the discount rate, which is the rate the Fed charges
on its short-term loans to banks and other depository institu-tions
in its role as lender of last resort. Increases in the
discount rate can lead to a restrictive credit situation in the
economy, and slow economic growth. On the other hand,
lowering the discount rate will increase the available supply
of credit and generally aid the growth rate of the economy.