What does the discount rate influence when changed by the Federal Reserve?

The discount rate is the interest rate charged by the Federal Reserve to member banks for short-term loans. When the Federal Reserve changes the discount rate, it directly influences the cost of borrowing for these banks. If the discount rate is lowered, member banks can borrow money more cheaply, which encourages them to lend more to consumers and businesses. Conversely, if the discount rate is increased, borrowing becomes more expensive for banks, which may lead to tighter lending practices.

This action has a cascading effect on the broader economy, particularly influencing overall interest rates that consumers face for mortgages, personal loans, and other forms of credit. Therefore, the discount rate is a powerful tool used by the Federal Reserve to control monetary policy, affecting not just banks but also individuals and businesses depending on borrowing for their financial needs.