Discount Rate The Federal Reserve uses two other types of tools in addition to open market operations (OMO), and they are discount rates and reserve requirements. The FOMC is responsible for the OMO, and the Board of Governors of the Federal Reserve System deals with the discount rate and reserve requirements. The three fundamental tools can influence supply, demand, and balances held by the depository institution, which can cause the federal funds rate to change. In 1913, the Federal Reserve system was enacted, which has three main objectives; eradicate the reserve “pyramid” in New York City and replace it with a polycentric system of twelve reserve banks, which will assist banks with a more seasonally elastic supply of credit and minimize the tendency for bank panics (Calomiris, 1993). The discount rate set by the Federal Reserve System is used for the interest rates charged to commercial banks and other banks for overnight loans (discount window) borrowed from the Federal Reserve (Board of Governors of the Federal Reserve System, 2013) . By discounting the lending rate, banks would have fewer liquidity problems because they are able to borrow at a lower rate, which therefore reduces pressure on reserve markets and keeps financial markets steady. To assist depository institutions in primary credit, the Federal Reserve Bank has developed three discount rates, namely primary credit, secondary credit and seasonal credit. First, the primary credit program allows the depository institution with solid financial conditions to extend its loans for a very long period. short period of time such as overnight loans. Prime credit rates are lower because depository institutions are stagnant, petty...... middle of paper......, restrictive monetary policy is used to slow the rate of GDP growth and reduce the inflation rate. All in all, both monetary policies are used to alter inflation and GDP growth rate and thus to support economic activity. The other two tools that can be used by the Federal Reserve in addition to the open market operation are the discount rate and reserve requirements. The three tools mentioned can change the federal funds rate. The discount rate is used to help the depository institution solve its liquidity problems and there are three discount rates that banks can use depending on their needs, they are primary credit, secondary credit and seasonal credit . Additionally, the reserve ratio has helped banks with stability and financial stress by allowing depository institutions to reserve amounts of funds in the form of cash in the vault or deposit in Federal Reserve banks.