If the Federal Reserve sets its discount rate too high relative to other money market interest rates, banks are forced to borrow more heavily in the open market, increasing the volatility of interest rates in the open market.

Question

Quizplus · Accepted Answer

When the Federal Reserve sets its discount rate higher than other money market rates, banks are discouraged from borrowing directly from the Fed and are more likely to seek funds in the open market. This increased demand for funds in the open market can lead to higher volatility in interest rates as banks compete for available funds.

If the Federal Reserve Sets Its Discount Rate Too High