Buzzword: Discount rate

The lender of last resort brings us this week’s Marketplace Money Buzzword: Discount Rate

The discount rate is what the Fed charges commercial banks for loans. It’s not to be confused with what commercial banks charge each other. That’s the Federal Funds rate.

This week the Fed made noise when they cut the discount rate by a half-point. It showed how bad the credit crunch had become.

See, banks prefer borrowing from other banks, ’cause it’s cheap. But when there’s a money crisis and loans get scarce, sometimes there’s no choice. Go to the central bank or try another option: Sell lemonade?