The federal funds discount rate is the one charged by the Federal Reserve Bank for short term loans to lending institutions. Such institutions may even seek a different means to meet its short time lending needs. Still, most of the time, they will need to know the current federal funds discount rate for various reasons. The Federal Reserve Bank has a second type of interest rates beyond the one listed above. It is called the overnight lending rate or federal funds rate.
This is a type of borrowing that is normally limited in its scope and not a standard all purpose practice. With the federal funds discount rate each institution will know prior to actually getting a loan what their costs are so they can determine if it is the best way for them to get a loan. In some cases the change can have on so many different situations. How many factors are involved with affecting such rates will obviously vary at times, but it can be assured there will always be changes.
One of the most common times for lending institutions to seek the federal funds discount rate is when their reserves might go below the minimum required. As a rule the higher the federal funds discount rate will translate into higher mortgage rates. In addition, when the rate goes up so does the prime rate and this will slow the demand for loans, which can eventually affect the housing market. They all work together as those who are employed in banks and other lending institutions understand, so it is natural they monitor changes to find the best times for taking out such loans.
The good thing for financial institutions is when the federal funds discount rate goes down it also means that the prime rate will go down and demands for loans will go up. So it is understandable how changes in the federal funds discount rate are watched and monitored on a regular basis by so many different individuals. It doesn’t take long to appreciate just how big of an impact the slightest change has on situations.
To individuals that will eventually seek a home loan or help from any lending institution being aware of the federal discount rate can help in knowing when it will be the best to seek a loan. A small change on a home loan interest rate can be significant when you are talking a thirty year mortgage. Thus it would be advisable for those looking for a loan to get the facts on the federal fund discount rate at a given time.