In 2015, one article in the Wall Street Journal discussed...

In 2015, one article in the Wall Street Journal discussed the possibility of "a September quarter-point increase in the Fed's range for overnight target rates," while another article noted, "the U.S. central bank's discount rate.... has been set at 0.75$\%$ since February 2010. a. What is the name of the Fed's "target rate"? b. Briefly explain who borrows money and who lends money at this "target rate." c. What is the discount rate, and how is it different from the "target rate?

In 2015, one article in the Wall Street Journal discussed the possibility of "a September quarter-point increase in the Fed's range for overnight target rates," while another article noted, "the U.S. central bank's discount rate.... has been set at 0.75$\%$ since February 2010.
a. What is the name of the Fed's "target rate"?
b. Briefly explain who borrows money and who lends money at this "target rate."
c. What is the discount rate, and how is it different from the "target rate?

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Key Concepts

Federal Funds Rate

The federal funds rate is the interest rate at which depository institutions lend reserve balances to one another overnight. It serves as a critical monetary policy tool, influencing broader economic factors such as inflation, liquidity, and overall financial stability by guiding borrowing costs in the economy.

Interbank Lending

Interbank lending involves transactions between banks where institutions with surplus reserves lend to those with temporary shortfalls. This process ensures that banks can meet their required reserve levels and facilitates the efficient operation of the overall payment and liquidity management systems.

Discount Rate

The discount rate is the interest rate charged by a central bank when lending funds directly to banks, typically through a facility known as the discount window. In contrast to the federal funds rate, which is determined by market conditions and interbank transactions, the discount rate is set administratively by the central bank and is generally higher to discourage banks from relying excessively on direct borrowing.

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