By lowering the discount rate, the Federal Reserve...

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The best way to answer this is to say that, by lowering the discount rate, the Federal Reserve is trying to stimulate the economy and bring about more economic activity.

The discount rate is the rate that the Federal Reserve charges banks when the banks want to borrow money.  Banks often have to borrow money for short period from the Fed.  The Fed sets the interest rate that it charges and that interest rate is called the discount rate.

When the Fed reduces the discount rate, it makes it cheaper for banks to borrow money.  This means banks are likely to borrow more.  When banks borrow more money, they will also be likely to lend more money.  Because borrowing costs less, banks can also charge less when they lend.  When banks are able to charge less and lend more, companies and individuals borrow more.  This means that more economic activity happens because companies are borrowing to expand their businesses and people are borrowing to make purchases.

Thus, when the Red reduces the discount rate, it will likely stimulate the economy and bring about more economic activity.

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