What Is The Fed's "Discount" Rate And Does It Affect Housing?

by Blanche Evans, Realty Times

The Federal Reserve rate cut of last Friday failed to stop the bleeding in the U.S. stock market. That's because the Fed cut the "discount" rate, not the federal funds interest rate. What's the difference and how will housing be impacted?

You won't find the answer on financial news sites. They talk in jargon. Either that, or the journalists themselves don't know what the differences mean.

So if they don't know, you probably don't know either.

So here's a little lesson in American federal money flow management.

The Federal Reserve is the bank of the federal government and the guardian of the U.S. economy, and as such, regulates monetary and credit policies such as buying and selling securities, setting the cost of credit (interest rates,) how much money is available to banks for borrowing, and how fast and at what rates the money has to be repaid. The idea behind the Federal Reserve is to keep things running smoothly, so banks that are members of the Fed are federally insured, which is reassuring to depositors like you and me.

To accomplish the flow of money, The Fed operates 12 regional banks, who monitor the economy and loan money to "member" depository banks -- (member FDIC.)

There are two ways banks can borrow money using Fed-insured funds. They can borrow money directly from the Fed using the "discount" rate, or they can borrow from each other using the "federal funds" interest rate. Both are short-term or overnight rates.

The discount rate is designed to improve liquidity for the banks themselves. The federal funds interest rate is designed to improve or limit liquidity or access to credit for consumers.

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