Monday 921

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 10 Money and Prices in the Long Run
Chapter 29 of 36 The Monetary System
Section 18 of 20
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The Fed has three tools for changing the money supply
-1- open-market operations
-2- reserve requirements
-3 - the discount rate
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-3 - The Discount Rate
The discount rate is the interest rate on loans the Fed makes to banks.
A bank borrows from the Fed at the discount rate when its reserves are too low to meet its reserve requirements.
This can happen because the bank
· has made too many loans
· has had unexpectedly large withdrawals
When the Fed makes such a loan to a bank
· the banking system now has more reserves
· these additional reserves allow banks to make new loans, creating more money
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By changing the discount rate the Fed can alter the money supply.
A higher discount rate
· reduces the amount of reserves banks have
· which reduces bank loans and the money supply
A lower discount rate
· increases the amount of reserves banks have
· which increases bank loans and the money supply
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The Fed uses discount lending not only to control the money supply but also to help troubled banks and other financial institutions.
When the stock market crashed by 22% on October 19, 1987 many Wall Street brokerage firms temporarily needed more money to finance the high volume of stock trading.
The Fed provided additional loans to banks.
Many economists believe the Fed’s reaction to the stock crash was a main reason the crash had little lasting effect.
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In 2007 and 2008 a fall in United States house prices caused a huge rise in the number of homeowners defaulting on their mortgage loans.
Many banks holding those mortgages became seriously troubled, the value of the mortgages became lower than the value of the homes.
To prevent bank failures from causing broader economic failures the Fed provided loans to many of the distressed banks.
… …
declining house prices
jūtaku kakaku no geraku
住宅価格の下落
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What is the current discount rate and when was it last changed? ChatGPT:
As of September 21, 2026, the Federal Reserve’s discount rate is 4.00%.
It was last changed on September 17, 2026, when the Fed raised it by 0.25 percentage point from 3.75% to 4.00%.
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4% is the target interest rate the Fed recently decided on and is using open market operations to achieve? CGPT:
Not exactly. The 4.00% figure is the discount rate, which is what the Fed charges banks that borrow directly from it.
The Fed’s main policy target is the federal funds rate, and on September 16, 2026 the FOMC raised its target range to 3.75%–4.00%.
The New York Fed then uses open-market operations and other tools to keep the actual federal funds rate within that range.
So: discount rate = 4.00%; federal funds target range = 3.75%–4.00%.