Econ Militia: What is the Federal Reserve discount rate?

So why did the Federal Reserve Bank increase their discount rate? The discount rate is what the Fed charges member banks to borrow money from them. The other rate, the fed funds rate, is what the Fed suggests member banks use to loan money to one another.

But banks aren't loaning money to one another. Why? For the same reason they're not loaning money to you and me -- fear! But is the Fed trying to alleviate that fear? Raising the rate increases the risk of inflation, and is the equivalent of throwing your kid into the deep end of the pool and expecting him to swim.

And with the economy in the shape it's in, we all feel like we're drowning. Thanks, Chairman Bernanke, for throwing us into the pool.

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[Reckless3057]

But isn't the difference that bank to bank lending is much more limited then borrowing from the Fed? if Fed rates are higher, i can see that banks would want to then take on a lower rate from another bank. but systematically there has to be less money moving. therefore higher rates all over? don't higher rates reduce the incentive to borrow and thus incourage thrift?

[EconMilitia]

Borrowing from the Fed is always more expensive than borrowing from a member bank (the fed funds rate). Usually it's 1 point higher. Since the end of 2008, the fed funds rate has been between 0 and 0.25%.

Higher rates aren't shown to encourage thrift, but rather are well known to cause slower growth. This is the opposite of what the economy needs, given unemployment, consumer confidence, and the Fed's comments about the recovery not being self-sufficient.

So why are they doing it? I dunno.

[khanpreston1]

y would increase in discount rate,increase inflation?

[MrBankRuns]

Think about this: Why do they require an interest payment on money they create at will. I think it is make everyone work harder for the money (in one form or another). You have the illusion of value. As long as everyone accepts the currency no one is the wiser.

[WideWorldOfWisdom]

Stop the mass purchase of Treasuries by whom? I would think a proper move would be to stop ISSUING them for a while (i.e. government stop borrowing into deficits)...something which, reducing the size of the budget would certainly help.

You'll have no argument from me there.

[WideWorldOfWisdom]

I'm well aware of the definition fudging. I tend to agree with Mises on this one:

"Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise."

[EconMilitia]

We've recorded a couple more episodes dealing specifically with the Federal Reserve, and some answers will come out of those.

I think a good start would be to stop the mass purchase of Treasuries. Another would be to reduce the size of the budget.

[EconMilitia]

Inflation is a rise in the level of prices of goods and services. This should not be confused with monetary inflation. I don't subscribe to the theory that the two are interchangeable, for reasons rather too complex to describe here.

It's also incorrect to connect this move to changing the money supply, given the ongoing quantitative easing.

[WideWorldOfWisdom]

Since when does keeping rates artificially low create growth? That's what causes BUBBLES. How many of those do we have to go through before people realize bubble inflation is not the same thing as "growth?"

What is YOUR solution? (Not that I think this tiny Fed hike is the right one..it's really so small it doesn't even matter, but it's certainly better than LOWERING rates..which sounds like what you would have them do.)

[WideWorldOfWisdom]

No, still doesn't make sense. I don't quite see how "inflationary pressure" is created by increasing rates. Inflation is an increase in the money supply. An increase in the interest rate will take money out of the free market and, in a way, contract the money supply...which is the opposite of inflation.

From where does "inflationary pressure" come?