In the recent past, the Federal Reserve has set the discount rate 096

equal to the prime rate

below the federal funds rate

above the prime rate

09

above the federal funds rate

0%

above the federal funds rate.

Explanation:

The Federal Reserve System ( popularly referred to as the 'Fed') was created by the Federal Reserve Act, passed by the U.S Congress on the 23rd of December, 1913. The Fed began operations in 1914 and just like all central banks, the Federal Reserve is a United States government agency.

Generally, it comprises of twelve (12) Federal Reserve Bank regionally across the United States of America.

Like all central banks, the Federal Reserve is a government agency that is saddled with the following responsibilities;

I. The Fed controls the issuance of currency in United States of America: it promotes public goals such as economic growth, low inflation, and the smooth operation of financial markets.

II. It provides banking services to all the commercial banks in the country because the Federal Reserve is the "lender of last resort."

III. It regulates banking activities in the United States of America: it has the power to supervise and regulate banks.

Also, the Fed is saddled with the responsibility of selling government securities such as treasury bills to the public.

The federal funds rate can be defined as the interest rate depository financial institutions such as banks charge each other for lending out excess cash from their reserve balances overnight without any form of collateral required.

The Federal Open Market Committee (FOMC) are typically responsible for making monetary policy such as setting the federal funds rate and determination of the direction of a monetary policy in the United States of America.

Additionally, a rate set by the Federal Reserves Bank known as the federal funds rates are used to determine the floating-rate of securities such as bonds.

A discount rate can be defined as the interest rate the Federal Reserve charges any bank that borrow directly from it.

Generally, the discount rate is set 100 basis points (1 percentage point) above the federal funds rate target, so as to encourage banks to borrow from each other at the lower federal funds rate. Also, this would help the banks to monitor each other for credit risk and liquidity.

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