Question

Why might the Federal Reserve have raised the discount rate three times this year, from 0% to 2%? What is the Fed trying to accomplish with these actions? How do you if the actions are working? What might be problems with these actions?

Answer 1

Fed discount rate is the rate at which US federal reserve bank charges it's member banks to borrow from each other at the discounted window to maintain the cash reserves.

So when these member banks want to borrow money from other banks outside the discounted rate they will find that even other banks have raise their interest rates which will discourage them to borrow money.

Fed raises the discount rates only when they want to decrease the money supply in circulation and increase the interest rates in the economy. When Fed want to implement the contractionary monetary policy to recure the lending in the economy and make people to save more money they increase the discount rate. All loan rates will go up thus reduce the customer of financial institutions to borrow less money from them.

If the actions are working inflation will go down.The main problem is that econmiec growth slows down, business expansion will not take places, banks will not get interest income from loans.