<p><a href="https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp#" rel="nofollow noreferrer">Here</a>, it's given that:</p>
<blockquote>
<p>The first tool used by the Fed, as well as central banks around the world, is the manipulation of short-term interest rates. Put simply, this practice involves raising/lowering interest rates to slow/spur economic activity and control inflation.</p>
</blockquote>
<p>In this, is the interest rate we are talking about, <strong>the Discount Rate</strong> the Fed gives to banks to borrow money?</p>
<p>Thanks</p>

CC BY-SA 4.0
2022-04-10T16:56:54.113Z
Hi @MangoPizza. The Fed basically buys and sells two forms of debt: (1) Treasuries and (2) central bank reserves. By intervening with Treasuries, the Fed are able to determine the effective federal funds rate (EFFR). The EFFR is essentially an interest rate within a targeted interval. By contrast, the discount rate is the rate at which commercial banks borrow reserves from the central bank. For a more complete understanding of central banking, and all the potential instruments and objectives, check out Ricardo Reis. Very good economist. youtube.com/watch?v=tm0cjuMdH8E
EB3112
CC BY-SA 4.0
2022-04-10T17:58:16.770Z
@EB3112 My question is not about the difference. In the given paragraph, what is the "interest rate" that is mentioned? Interest Rate on what? Who gives the interest rate and for why? I think the interest rate is the discount rate, but I am not sure. Thanks.
MangoPizza
CC BY-SA 4.0
2022-04-10T20:36:03.797Z
Hi @MangoPizza. Apologies if you found a lack of clarity in what I said. The discount rate is a type of interest rate, yes. In particular, it is the cost at which central banks are willing to lend reserves (central bank debt) to commercial banks. Commercial banks need this debt/reserves, because it is a special type of money that commercial banks accept for settlements. But as mentioned above, there is also a different type of interest rate which the Fed target, called the EFFR. This is the rate at which short-term debt/securities are traded. The Reis video I attached should help clarify.
EB3112
<macroeconomics><interest-rate><federal-reserve>
Does the Fed Change the Discount Rate in Monetary Policy?
MangoPizza
# Does the Fed Change the Discount Rate in Monetary Policy?

(Asked by: username_0 on 2022-04-10)

[Here](https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp#), it's given that:

> The first tool used by the Fed, as well as central banks around the world, is the manipulation of short-term interest rates. Put simply, this practice involves raising/lowering interest rates to slow/spur economic activity and control inflation.

In this, is the interest rate we are talking about, **the Discount Rate** the Fed gives to banks to borrow money?

Thanks

**Tags:** macroeconomics, interest-rate, federal-reserve

> **Comments:**
> **username_1**: Hi @username_0. The Fed basically buys and sells two forms of debt: (1) Treasuries and (2) central bank reserves. By intervening with Treasuries, the Fed are able to determine the effective federal funds rate (EFFR). The EFFR is essentially an interest rate within a targeted interval. By contrast, the discount rate is the rate at which commercial banks borrow reserves from the central bank. For a more complete understanding of central banking, and all the potential instruments and objectives, check out Ricardo Reis. Very good economist. youtube.com/watch?v=tm0cjuMdH8E  
> **username_0**: @username_1 My question is not about the difference. In the given paragraph, what is the "interest rate" that is mentioned? Interest Rate on what? Who gives the interest rate and for why? I think the interest rate is the discount rate, but I am not sure. Thanks.  
> **username_1**: Hi @username_0. Apologies if you found a lack of clarity in what I said. The discount rate is a type of interest rate, yes. In particular, it is the cost at which central banks are willing to lend reserves (central bank debt) to commercial banks. Commercial banks need this debt/reserves, because it is a special type of money that commercial banks accept for settlements. But as mentioned above, there is also a different type of interest rate which the Fed target, called the EFFR. This is the rate at which short-term debt/securities are traded. The Reis video I attached should help clarify.  

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## 0 answers

