An agency from which
member banks of the
Federal Reserve can
borrow funds. Banks borrow short-term
funds at the
discount rate from the discount window, and must provide
collateral for the
transaction. The idea behind the discount window is to provide
liquidity to banks when they need it without making them too reliant upon it. The Federal Reserve accomplishes this by raising or lowering the discount rate: a low interest rate indicates that it is trying to promote
growth by making
liquidity easily available, and a high interest rate shows that the Fed is concerned about
inflationary pressures on the economy and trying to reduce the amount of
money in the economy. While the discount window provides services electronically now, the term comes from an actual bank where representatives of member banks used to go to borrow
money from the Federal Reserve.