There seem to be different rates that the Fed raises or lowers. What are they?


Question/Comment: Last month, the stock market dived about 380 points in one day, then recovered the same day. That same day, the Fed lowered its rate .5 percent. Now I just heard it’s lowering its rate for the first time in many months. Obviously we’re talking about two different rates. What are they? And what’s the difference?

Paul Solman: The “discount rate” is what the Fed charges banks for loans they take; usually overnight to cover obligations they’ve got to OTHER banks or financial institutions. But the Fed can lend the money out for longer periods – say, 30 days. That can get banks over the hump when markets panic, and it’s why the Fed DID “open the discount window” by freely lending to banks for longer periods recently. It’s also “lowered the discount rate” to make it CHEAPER for banks to borrow.

The rate you hear more about is the FED FUNDS rate. That’s the rate banks charge each other for overnight borrowing. Since many other interest rates throughout the economy are pegged to the Fed Funds rate, lowering it or tightening it tends to goose or restrain the economy.

In our “explainer,” the punch bowl analogy applies to the Fed Funds rate. The emergency measures taken during the global market panic involved the “discount” rate. So the Fed lowered the discount rate without warning in a pinch; it lowered the Fed Funds rate at its regular every-6-weeks meeting. But then it also lowered the discount rate, since they never move very far from one another.