Economics educators have been using the term Discount Rate for so
long, and yet this term was officially discontinued nearly 20 years ago
on January 9, 2003.
This is when the term Primary Credit Rate took the place of the term
Discount Rate.
The graph to the right shows the Discount Rate being discontinued
and the Discount Window Primary Credit Rate taking its place at the
beginning of 2003.
There are three different discount rates of the Federal Reserve (primary
credit rate, secondary credit rate, and seasonal credit rate), with the
primary credit rate being the least expensive and the seasonal credit
rate being the most expensive. The Federal Reserve is the lender of
last resort and when commercial banks have to borrow from the FED,
they borrow at the Discount Window Primary Credit Rate.
long, and yet this term was officially discontinued nearly 20 years ago
on January 9, 2003.
This is when the term Primary Credit Rate took the place of the term
Discount Rate.
The graph to the right shows the Discount Rate being discontinued
and the Discount Window Primary Credit Rate taking its place at the
beginning of 2003.
There are three different discount rates of the Federal Reserve (primary
credit rate, secondary credit rate, and seasonal credit rate), with the
primary credit rate being the least expensive and the seasonal credit
rate being the most expensive. The Federal Reserve is the lender of
last resort and when commercial banks have to borrow from the FED,
they borrow at the Discount Window Primary Credit Rate.
Another MAJOR change occurred on July 29, 2021 when the interest
rate on excess reserves (IOER) and the interest rate on required
reserves (IORR) were replaced with a single rate, the interest rate on
reserve balances (IORB or IOR), since the reserve requirement was
eliminated on March 26, 2020. Changing the IOR is now the primary
monetary tool used by the FED to move the Federal Funds Rate (FFR)
in its desired direction.
rate on excess reserves (IOER) and the interest rate on required
reserves (IORR) were replaced with a single rate, the interest rate on
reserve balances (IORB or IOR), since the reserve requirement was
eliminated on March 26, 2020. Changing the IOR is now the primary
monetary tool used by the FED to move the Federal Funds Rate (FFR)
in its desired direction.
The red line on the graph to the left relates to the DR or PCR on the graph below.
The green line on the graph to the left relates to the IOR on the graph below.
The blue line on the graph to the left relates to the FFR on the graph below.
The green line on the graph to the left relates to the IOR on the graph below.
The blue line on the graph to the left relates to the FFR on the graph below.
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As you can tell by the interactive graph above, the Federal Funds Rate
(FFR) has risen recently as the FED raises the Interest on Reserve
Balances (IOR) that commercial banks hold at the FED. This in turn
pulls the FFR upward. The Primary Credit Rate (PCR) automatically
rises as it is set by the FED a certain number of basis points (a certain
percentage) above the IOR. When the IOR rises so does the PCR or DR.
(FFR) has risen recently as the FED raises the Interest on Reserve
Balances (IOR) that commercial banks hold at the FED. This in turn
pulls the FFR upward. The Primary Credit Rate (PCR) automatically
rises as it is set by the FED a certain number of basis points (a certain
percentage) above the IOR. When the IOR rises so does the PCR or DR.
On the graph above, take your cursor or finger and drag the IOR
upward. This in turn lifts the other administered rate, the PCR,
upward. But, most importantly, this pulls the FFR upward.
Notice on the graph to the left the IOR, PCR, and FFR are all
rising quickly after the first quarter of 2022. This is because
the FED has been increasing the IOR, which is now the primary
tool of monetary policy to raise the FFR to try and slow the inflation
rate in the economy.
upward. This in turn lifts the other administered rate, the PCR,
upward. But, most importantly, this pulls the FFR upward.
Notice on the graph to the left the IOR, PCR, and FFR are all
rising quickly after the first quarter of 2022. This is because
the FED has been increasing the IOR, which is now the primary
tool of monetary policy to raise the FFR to try and slow the inflation
rate in the economy.
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On the interactive Dual Mandate Bulls Eye Dart Board below, you see on the x axis the unemployment rate as
measured by U3, which is the official unemployment rate according to the Bureau of Labor Statistics (BLS),
you see on the y axis the Personal Consumption Expenditures Index (PCE Index) that the FED uses to measure
the inflation rate, and you see the blue bulls eye that represents the targeted inflation rate (stable prices) and the
Natural Rate of Unemployment, which is now entitled the Non-Cyclical Rate of Unemployment (maximum employment).
To play the interactive activity, follow the directions underneath the dart board. As you can see by the purple
highlight that the Non-Cyclical Rate of Unemployment (long-run rate) changes over time.
measured by U3, which is the official unemployment rate according to the Bureau of Labor Statistics (BLS),
you see on the y axis the Personal Consumption Expenditures Index (PCE Index) that the FED uses to measure
the inflation rate, and you see the blue bulls eye that represents the targeted inflation rate (stable prices) and the
Natural Rate of Unemployment, which is now entitled the Non-Cyclical Rate of Unemployment (maximum employment).
To play the interactive activity, follow the directions underneath the dart board. As you can see by the purple
highlight that the Non-Cyclical Rate of Unemployment (long-run rate) changes over time.
The Dual Mandate -- An amendment to the Federal Reserve Act in 1977 specifically assigned monetary policy
responsibility for promoting "the goals of maximum employment, stable prices, and moderate long-term interest
rates," commonly referred to as the dual mandate. Even though there are three goals, the dual mandate is
maximum employment and stable prices.
responsibility for promoting "the goals of maximum employment, stable prices, and moderate long-term interest
rates," commonly referred to as the dual mandate. Even though there are three goals, the dual mandate is
maximum employment and stable prices.
The FED -- this stands for the Federal Reserve.
Reserves -- these are commercial bank reserves that are held at the Federal Reserve (FED).
Interest on Reserve Balances (IOR or IORB) -- is the interest that the FED pays banks to store these reserves.
IOR is now the primary tool of monetary policy used by the FED.
Discount Rate -- is now entitled the Primary Credit Rate. This is the rate that the FED charges member banks to
borrow from money from the FED, as a lender of last resort.
Reserves -- these are commercial bank reserves that are held at the Federal Reserve (FED).
Interest on Reserve Balances (IOR or IORB) -- is the interest that the FED pays banks to store these reserves.
IOR is now the primary tool of monetary policy used by the FED.
Discount Rate -- is now entitled the Primary Credit Rate. This is the rate that the FED charges member banks to
borrow from money from the FED, as a lender of last resort.
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| Prerequisite definitions for understanding the relatively NEW Monetary Policy entitled Ample Reserves Regime: |
| Dual Mandate Bulls Eye Dart Board -- Maximum Employment and Stable Prices |
| Discount Rate Name Change to the Primary Credit Rate |
| Reserve Requirement was eliminated by the FED on March 26, 2020 |
| Contractionary Monetary Policy Graphs and Flow Chart in an Ample Reserves Regime |
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| Expansionary Monetary Policy Graphs and Flow Chart in an Ample Reserves Regime |
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| Reffonomics Baseball Game covering the Ample Reserves Regime |
Follow the directions underneath the flow chart. Remember to show on the correct graph (Ample Reserves and
ASAD graph) when you are instructed to do so in red letters inside the flow chart.
ASAD graph) when you are instructed to do so in red letters inside the flow chart.
Follow the directions underneath the flow chart. Remember to show on the correct graph (Ample Reserves and
ASAD graph) when you are instructed to do so in red letters inside the flow chart.
ASAD graph) when you are instructed to do so in red letters inside the flow chart.
If the students can answer the 18 questions in this 9-inning baseball game, they are on their way to being able to
correctly answer the questions about the Ample Reserves Regime on their May exam.
correctly answer the questions about the Ample Reserves Regime on their May exam.
The games can be played inside the classroom by dividing the class into two teams (Team 1 and Team 2).
Each game has 18 questions representing 9 inings in a baseball game (1 question for the top of the inning; 1
question for the bottom of the inning).
The questions have a tendency to get progressively more difficult. After the two teams are divided and grouped
together on either side of the room, choose a captain for each team to come up with a batting order with the
students who know the most about economics going to the board in the latter innings and the ones who know
the least about economics going to the board in the earlier innings. If the class size is larger than 18 students,
have two students from each team go to the board in the earlier innings as not to embarrass any individual
student. Have the Team 2 batters for that inning go out in the hall so they cannot watch the question for
Team 1 batters. Keep score at the bottom of the game by pressing the plus or minus buttons.
Each game has 18 questions representing 9 inings in a baseball game (1 question for the top of the inning; 1
question for the bottom of the inning).
The questions have a tendency to get progressively more difficult. After the two teams are divided and grouped
together on either side of the room, choose a captain for each team to come up with a batting order with the
students who know the most about economics going to the board in the latter innings and the ones who know
the least about economics going to the board in the earlier innings. If the class size is larger than 18 students,
have two students from each team go to the board in the earlier innings as not to embarrass any individual
student. Have the Team 2 batters for that inning go out in the hall so they cannot watch the question for
Team 1 batters. Keep score at the bottom of the game by pressing the plus or minus buttons.
| Sample Questions on What Students Can Expect on the May Exam related to the Ample Reserves Regime |
If students can understand the answers to the questions below, they should do well on Ample Reserves Regime
questions on the May exam.
questions on the May exam.
To the right is a short video from The Dead Poets Society
starring Robin Williams where he instructs his students
to rip out pages from their poetry book which should
happen to many of the pages in economics textbooks
that relate to U.S. monetary policy of the past. Also,
it is quite ironic that Robin Williams draws a graph
about poetry on the blackboard, as graphs tell important
stories in economics.
starring Robin Williams where he instructs his students
to rip out pages from their poetry book which should
happen to many of the pages in economics textbooks
that relate to U.S. monetary policy of the past. Also,
it is quite ironic that Robin Williams draws a graph
about poetry on the blackboard, as graphs tell important
stories in economics.
Rip out any lesson on the tools of U.S. Monetary Policy that
include the reserve requirement and the discount rate as the
reserve requirement is no longer a tool of U.S. Monetary Policy
and the discount rate has been the primary credit rate offered
through the discount window since 2003. However, you still
will be required to know ALL these terms because the May
exam is taken by international students and some of the 76
central banks around the world might still be using these tools.
include the reserve requirement and the discount rate as the
reserve requirement is no longer a tool of U.S. Monetary Policy
and the discount rate has been the primary credit rate offered
through the discount window since 2003. However, you still
will be required to know ALL these terms because the May
exam is taken by international students and some of the 76
central banks around the world might still be using these tools.
March 22, 2019
Atlanta Fed president and CEO Raphael Bostic speaks at the San
Francisco Fed's Macroeconomics and Monetary Policy Conference
about the Federal Open Market Committee's recent decisions the
Committee continues to view the federal funds rate target as the
primary tool to adjust the stance of monetary policy.
Atlanta Fed president and CEO Raphael Bostic speaks at the San
Francisco Fed's Macroeconomics and Monetary Policy Conference
about the Federal Open Market Committee's recent decisions the
Committee continues to view the federal funds rate target as the
primary tool to adjust the stance of monetary policy.
February 23, 2021
The money supply? No longer relevant, Jerome Powell, Chairman
of the Federal Reserve, told Republican U.S. Senator John Kennedy
about the once-important measures of cash and easily spent assets
that was a central focus for the Fed in the past.
“When you and I studied economics a million years ago M2 and
monetary aggregates seemed to have a relationship to economic
growth,” Powell said, referring to one main measure of the money
in public hands. “Right now ... M2 ... does not really have important
implications. It is something we have to unlearn I guess.”
The money supply? No longer relevant, Jerome Powell, Chairman
of the Federal Reserve, told Republican U.S. Senator John Kennedy
about the once-important measures of cash and easily spent assets
that was a central focus for the Fed in the past.
“When you and I studied economics a million years ago M2 and
monetary aggregates seemed to have a relationship to economic
growth,” Powell said, referring to one main measure of the money
in public hands. “Right now ... M2 ... does not really have important
implications. It is something we have to unlearn I guess.”
NOTE: Your May exam will include not only the history of U.S.
Monetary Policy, but also the major changes that have occurred
in U.S. Monetary Policy with the Ample Reserves Regime.
Monetary Policy, but also the major changes that have occurred
in U.S. Monetary Policy with the Ample Reserves Regime.
| Steven M. Reff Economics Lecturer University of Arizona (2007 - 2016) The 2015 University of Arizona Five-Star Faculty Award |
Monetary Policy (2019 - ) The Ample-Reserves Regime
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When the FED changes the administered rate IOR, the PCR follows in the same direction. This change then pulls the FFR in the same
direction. This short-run rate interest change influences long-run rates. These long-run rates then begin to influence consumption and
investment. This change affects the economy. Press the Expansionary or Contractionary buttons to the left of the graph below.
direction. This short-run rate interest change influences long-run rates. These long-run rates then begin to influence consumption and
investment. This change affects the economy. Press the Expansionary or Contractionary buttons to the left of the graph below.
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| When the FED changes the IOR this changes the FFR |
| NOTE: Students DO NOT have to know anything about interest on ON RRP |