What is the discount rate?

The discount rate refers specifically to the interest rate that the Federal Reserve, which is the central bank of the United States, charges commercial banks and other depository institutions for short-term loans obtained from the Fed's discount window. This rate is a critical monetary policy tool used by the Federal Reserve to influence the money supply and stabilize the economy. When the discount rate is lowered, borrowing becomes cheaper for banks, which can lead to increased lending to consumers and businesses, thereby stimulating economic activity. Conversely, raising the discount rate makes borrowing more expensive, which can help cool off an overheating economy.

Understanding the role of the discount rate is essential as it impacts overall economic conditions, interest rates throughout the banking system, and can affect inflation and employment levels. Other options describe different financial concepts but do not accurately define what the discount rate is.