Long Term Perspective
The Federal Reserve also can tighten or loosen monetary policy by changing the discount rate (the rate at which banks can borrow from the Federal Reserve's discount window). Few banks actually borrow from the Fed since it signals poor reserve management. As a consequence, the discount rate is less meaningful as an indicator of Fed policy. Yet, financial market participants sometimes believe the Fed is trying to send a message when they change the discount rate at the same time as the funds rate. Old habits die-hard.
Short Term Perspective
The gap between the fed funds rate and the discount rate has remained constant over the past 18 months.
Fed Funds Rate Target vs. CPI Inflation Fed Funds Rate Target vs. Discount Rate Nominal GDP vs. M2 Growth
|