So the Fed's discount rate is the rate charged on commercial banks for borrowing funds from it. The question is how does the Discount rate affect the overall level of interest rates in the economy including the risk-free rate (I know that as discount rate increases risk-free rate tends to increase, but why?). Why would commercial banks want to borrow from the Fed if they can borrow at the lower Fed-fund rate from other banks. Do economic agents simply use the discount rate as a benchmark and adjust their interest rates accordingly?

  • $\begingroup$ The fed funds rate is directly influenced by the FED. The reason other rates move is opportunity costs and competition. $\endgroup$
    – AKdemy
    Commented Aug 16, 2023 at 18:09


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