Question

how the trends and changes of the federal funds rate and/or the discount rate have impacted short-term or long-term interest rates for 2000-2010

Answer 1

The interest rate which banks charge each other to lend the Federal Reserve Funds overnight is called fed funds rate. The reserve requirement prevents the banks from lending every dollar that they have. It is used as a tool to control the economic growth of the country.

When it is less expensive for banks to borrow money from the Fed, they can charge less interest on their loans. A higher discount rate would mean it is more expensive for the banks to borrow funds and hence, they will charge higher interest rates from the customers.

TRENDS/CHANGES:

Federal funds rate and discount rate decreased during 2001 as the Fed tried using monetary policy to stimulate the weak economy. In 2002, Fed Funds Rate target of 1.75% resulted in the lowest average market interest rates since 1961. The Jan 2002 discount rate of 1.25% was the lowest since 1948.