When the Fed increases the discount rate, the spread between the discount rate and the fed funds rate increases and the cost of being short of reserves increases.

Question

Quizplus · Accepted Answer

When the Fed increases the discount rate, it becomes more expensive for banks to borrow from the Fed's discount window. Banks will instead try to attain funds from other sources, such as the interbank market, where the fed funds rate is set. This increase in demand for fed funds pushes up the rate, resulting in an increased spread between the discount rate and the fed funds rate. As a result, the cost of being short of reserves, or not having enough funds to meet daily requirements, also increases.

When the Fed Increases the Discount Rate, the Spread Between