Is the interest rate the Federal Reserve banks charge commercial banks for credit when they borrow?

Q: Does the Federal Reserve charge interest?

The payment of interest on banks reserve balances is a common monetary policy tool at the disposal of major central banks. The Congress authorized the Federal Reserve to pay interest on balances that banks hold at the Fed, effective in late 2008. Since then, the Federal Reserve has paid interest on those balances.

Source: Board of Governors of the Federal Reserve System (US)

Inhaltsverzeichnis Show

Is the interest rate that the Fed charges commercial banks when they want to borrow?
What is the interest rate charged by the Federal Reserve called?
Does the Federal Reserve charge interest?
Why do commercial banks borrow from the Federal Reserve?

Release: H.15 Selected Interest Rates

Units: Percent, Not Seasonally Adjusted

Frequency: Monthly

Notes:

Averages of daily figures.

For additional historical federal funds rate data, please see Daily Federal Funds Rate from 1928-1954.

The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. (1) The rate that the borrowing institution pays to the lending institution is determined between the two banks; the weighted average rate for all of these types of negotiations is called the effective federal funds rate.(2) The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target.(2)
The Federal Open Market Committee (FOMC) meets eight times a year to determine the federal funds target rate. As previously stated, this rate influences the effective federal funds rate through open market operations or by buying and selling of government bonds (government debt).(2) More specifically, the Federal Reserve decreases liquidity by selling government bonds, thereby raising the federal funds rate because banks have less liquidity to trade with other banks. Similarly, the Federal Reserve can increase liquidity by buying government bonds, decreasing the federal funds rate because banks have excess liquidity for trade. Whether the Federal Reserve wants to buy or sell bonds depends on the state of the economy. If the FOMC believes the economy is growing too fast and inflation pressures are inconsistent with the dual mandate of the Federal Reserve, the Committee may set a higher federal funds rate target to temper economic activity. In the opposing scenario, the FOMC may set a lower federal funds rate target to spur greater economic activity. Therefore, the FOMC must observe the current state of the economy to determine the best course of monetary policy that will maximize economic growth while adhering to the dual mandate set forth by Congress. In making its monetary policy decisions, the FOMC considers a wealth of economic data, such as: trends in prices and wages, employment, consumer spending and income, business investments, and foreign exchange markets.
The federal funds rate is the central interest rate in the U.S. financial market. It influences other interest rates such as the prime rate, which is the rate banks charge their customers with higher credit ratings. Additionally, the federal funds rate indirectly influences longer- term interest rates such as mortgages, loans, and savings, all of which are very important to consumer wealth and confidence.(2)
References
(1) Federal Reserve Bank of New York. "Federal funds." Fedpoints, August 2007.
(2) Board of Governors of the Federal Reserve System. "Monetary Policy".

Suggested Citation:

Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, October 4, 2022.

Source: Board of Governors of the Federal Reserve System (US)

Release: G.19 Consumer Credit

Units: Percent, Not Seasonally Adjusted

Frequency: Monthly

Notes:

For further information, please refer to the Board of Governors of the Federal Reserve System's G.19 release, online at http://www.federalreserve.gov/releases/g19/.

Suggested Citation:

Board of Governors of the Federal Reserve System (US), Finance Rate on Consumer Installment Loans at Commercial Banks, New Autos 48 Month Loan [TERMCBAUTO48NS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TERMCBAUTO48NS, October 4, 2022.

Source: Board of Governors of the Federal Reserve System (US)

Release: G.19 Consumer Credit

Units: Percent, Not Seasonally Adjusted

Frequency: Monthly

Notes:

For further information, please refer to the Board of Governors of the Federal Reserve System's G.19 release, online at http://www.federalreserve.gov/releases/g19/.

Suggested Citation:

Board of Governors of the Federal Reserve System (US), Commercial Bank Interest Rate on Credit Card Plans, All Accounts [TERMCBCCALLNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TERMCBCCALLNS, October 4, 2022.

Is the interest rate that the Fed charges commercial banks when they want to borrow?

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility—the discount window.

What is the interest rate charged by the Federal Reserve called?

The interest rate on reserve balances (IORB rate) is determined by the Board and is an important tool for the Federal Reserve's conduct of monetary policy. For the current setting of the IORB rate, see the most recent implementation note issued by the FOMC.

Does the Federal Reserve charge interest?

The payment of interest on banks' reserve balances is a common monetary policy tool at the disposal of major central banks. The Congress authorized the Federal Reserve to pay interest on balances that banks hold at the Fed, effective in late 2008. Since then, the Federal Reserve has paid interest on those balances.

Why do commercial banks borrow from the Federal Reserve?

To encourage banks to first seek funding from market sources, the Federal Reserve lends at a rate that is higher, and thus more expensive, than the short-term rates that banks could obtain in the market under usual circumstances.