The federal reserve bank loaned money to banks and thrifts and charged an interest rate called the Federal discount rate.
The Federal discount rate is the interest rate the Federal reserve bank (the Central Bank in US) charges to bank and other depositary institutions when they loan them money. The Federal discount rate is a monetary policy tool for the Central Bank of a country.
The Federal reserve bank uses the Federal discount rate to adjust money supply in the economy. If the Fed wants to reduce money supply, they would increase the Federal discount rate. If the Federal discount rate is high, banks would increase the rate at which they make loans available. The high interest rate on loans would discourage people from taking out loans. This would lead to a reduction in money supply.
If the Fed wants to increase money supply, they will reduce the Federal discount rate. Banks would also reduce the interest rate for loans. As a result the rate of borrowing would be higher and the money supply would increase.
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