Banks whose reserves dip below the reserve requirement set by the Federal Reserve's board of governors use that money to correct their shortage.
The more money available, the more likely inflation will occur.The seasonal discount rate is for small community banks that need a claim ee reward card temporary boost in funds to meet local borrowing needs.Besides setting the discount rate, the Federal Reserve can influence money supply, credit and interest rates through open market operations (OMO).S.In fact, its open market operations is a very powerful operation that's not as well known as the discount rate or fed funds rate.How the Discount Rate Affects the Economy.Treasuries, whereas the discount rate is reached solely through review by the board of governors.
Healthy banks are allowed to borrow all they want at very short maturities (usually overnight) from the Fed's discount window, and it is therefore referred to as a standing lending facility.On August 17, 2007, the Fed board made the unusual decision to lower the discount rate without lowering the fed funds rate.These loans are normally extended on an overnight basis so that banks can meet short-term liquidity needs.It's usually changed by the Federal Reserve Board of Governors in conjunction with the fomc's changes in the fed funds rate.Borrowing from the central bank is a substitute for borrowing from other commercial banks, and so it is discouraged as a last-resort measure once the interbank overnight lending system has been maxed out.