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Discount rate

4 May, 2015 - 10:30

The Federal Reserve System also directly sets the "discount rate", which is the interest rate for "discount window lending", overnight loans that member banks borrow directly from the Fed. This rate is generally set at a rate close to 100 basis points above the target federal funds rate. The idea is to encourage banks to seek alternative funding before using the "discount rate" option 1. The equivalent operation by the European Central Bank is referred to as the "marginal lending facility" 2.

Both the discount rate and the federal funds rate influence the prime rate, which is usually about 3 percent higher than the federal funds rate.