Discount rate

Discount rate refers to an interest rate set by the Federal Reserve. This is imposed on banks that wish to borrow from it.

Usually, banks try to avoid borrowing from the Federal Reserve due to the stigma that comes with it. Many banks see this as a sign of weakness. Also, aside from the higher rate imposed by the Federal Reserve, many banks are under the impression that borrowing from it would only lead to tighter regulations. As a result, banks usually turn to the Federal Reserve for funds as a last resort.

Borrowing from the Federal Reserve is tied up with the concept of a discount window. The discount window, which is a function of monetary policy, gives banks or other similarly qualified entities the ability to borrow funds from the country’s central bank. Such loans are usually short-term ones which are aimed at addressing issues such as decreased liquidity. In the context of the United States, the Federal Reserve functions as the central bank.

The discount rate may also be referred to as the repo rate or base rate.

In the context of credit card dealings, though, the term discount rate can be used to refer to the amount that a business has to pay for the processing of credit card transactions. Businesses may enjoy lower rates than those usually offered, but this is also dependent on how often they engage in such transactions. Some businesses, therefore, may try to promote the use of credit cards among their clients, at least to a certain extent, as this may help reduce the overall cost of transaction processing.

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