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Many people know that the Federal Reserve sets interest rates in order to loan money to other banks so they can keep cash flowing throughout the U. But, sometimes, banks and thrifts need a little extra cash, mostly so they can meet the reserve requirement (the minimum amount of deposits banks need to be considered in good financial shape). To meet the reserve, the Fed has what’s known as the discount window, which allows banks to borrow money for a short period of time at a higher interest rate (called the discount rate) than the official Federal Funds rate. In fact, banks prefer to borrow from one another than directly from the discount window, since the interest owed can be cheaper and going to the discount window tends to imply that the bank is in a spot of trouble. The Fed, too, doesn’t like banks borrowing this way, which is why the discount rate is always higher than the target rate. Market Data provided by Interactive Data ( Terms & Conditions ). read more

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