Discount Rate vs. Fed Funds Rate: What’s been changed and what stayed the same.
The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured. [Source: Federal Reserve]
Here is a graph that shows the 5 year history of discount window borrowing:
The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. [Source: Federal Reserve]
So what did the Federal Reserve change? The press release outlined:
"At that meeting, the Committee left its target range for the federal funds rate [unchanged] at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
and
"The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent."
The net effect of this is diminished, since borrowing at the Discount Window has been significantly reduced from the $400 billion dollar high to an elevated $100 billion.
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