Discount Rate
The interest rate the Federal Reserve charges banks for short-term emergency loans from its discount window.
What is Discount Rate?
The discount rate (in its monetary policy sense) is the interest rate at which commercial banks can borrow directly from the Federal Reserve through the 'discount window' — the Fed's emergency lending facility for banks facing short-term liquidity shortfalls. The discount rate is typically set slightly above the federal funds rate target to make borrowing from the Fed a last resort rather than a routine funding source. In a separate finance context, a 'discount rate' also refers to the rate used to calculate the present value of future cash flows in discounted cash flow (DCF) analysis — a different but related concept rooted in the time value of money.
Example
During the 2008 financial crisis, the Federal Reserve dramatically lowered the discount rate and temporarily extended the term of discount window loans from overnight to 90 days to provide emergency liquidity to banks facing funding freezes. Banks borrowed over $100 billion through the discount window at the height of the crisis.