So What’s the Federal Funds Interest Rate? What's the Discount Rate? How Does This Affect Housing?

The Federal Reserve rate cut last month was the Discount Rate, not the Federal Funds Interest Rate. What’s the difference and how will it affect housing?

The way it is described on financial news sites is unintelligible. In simple terms,
1- The discount rate is designed to improve liquidity for the banks themselves.
2- The federal funds interest rate is designed to improve or limit liquidity or access to credit for consumers.

The Federal Reserve is the bank of the federal government, and as such, regulates monetary and credit policies such as buying and selling securities, setting the cost of credit (interest rates,) how much money is available to banks for borrowing, and how fast and at what rates the money has to be repaid.

Federal Reserve is designed to keep things running smoothly, thus banks that are members of the Fed are federally insured, which is reassuring to depositors.

To accomplish the flow of money, The Fed operates 12 regional banks, who monitor the economy and loan money to "member" depository banks -- (member FDIC.)

There are two ways banks can borrow money using Fed-insured funds. They can borrow money directly from the Fed using the "discount" rate, or they can borrow from each other using the "federal funds" interest rate. Both are short-term or overnight rates.

The discount rate is designed to improve liquidity for the banks themselves. The federal funds interest rate is designed to improve or limit liquidity or access to credit for consumers.

Last month, the Federal Open Market Committee (FOMC) had just met and decided not to raise or lower federal funds rate, leaving the 5.25% funds rate in place for the ninth meeting in a row. But after the Fed cut discount rates, many pundits believe that the next time the Fed meets, in September, the FOMC will vote to lower key interest rates by 25 to 50 basis points.

The expanding liquidity means that mortgage rates are likely to drift downward, which will make buying a home more affordable in the short-term.