§015d. (CB) Discount Rate

Cyclopedia

Discount Rate

Summary

The term discount rate in Congressional budgeting, generally refers to the “Federal discount rate”, which is the interest the Federal Reserve charges member financial institutions, such as banks and other depository institutions, to borrow directly from it.

Its more general definition is as a factor in the calculation of present value when analyzing a discounted cash flow.

The Discount Rate (Federal Reserve)

[The following is from the Federal Reserve Policy Tools Page: ]

The Discount Rate

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility–the discount window. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.

Under the primary credit program, loans are extended for a very short term (usually overnight) to depository institutions in generally sound financial condition. Depository institutions that are not eligible for primary credit may apply for secondary credit to meet short-term liquidity needs or to resolve severe financial difficulties. Seasonal credit is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs, such as banks in agricultural or seasonal resort communities.

The discount rate charged for primary credit (the primary credit rate) is set above the usual level of short-term market interest rates. (Because primary credit is the Federal Reserve’s main discount window program, the Federal Reserve at times uses the term “discount rate” to mean the primary credit rate.) The discount rate on secondary credit is above the rate on primary credit. The discount rate for seasonal credit is an average of selected market rates. Discount rates are established by each Reserve Bank’s board of directors, subject to the review and determination of the Board of Governors of the Federal Reserve System. The discount rates for the three lending programs are the same across all Reserve Banks except on days around a change in the rate.

OMB Circular No. A-94 (Revised)

OMB Circular No. A-94

Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs

[The following are the introductory paragraphs from the Circular A-94, but the entire documents need to be considered in its entirety. Emphasis in text added]

1. Purpose. The goal of this Circular is to promote efficient resource allocation through well-informed decision-making by the Federal Government. It provides general guidance for conducting benefit-cost and cost-effectiveness analyses. It also provides specific guidance on the discount rates to be used in evaluating Federal programs whose benefits and costs are distributed over time. The general guidance will serve as a checklist of whether an agency has considered and properly dealt with all the elements for sound benefit-cost and cost-effectiveness analyses.

2. Rescission. This Circular replaces and rescinds Office of Management and Budget (OMB) Circular No. A-94, “Discount Rates to Be Used in Evaluating Time-Distributed Costs and Benefits,” dated March 27, 1972, and Circular No. A-104, “Evaluating Leases of Capital Assets,” dated June 1, 1986, which has been rescinded. Lease-purchase analysis is only appropriate after a decision has been made to acquire the services of an asset. Guidance for lease-purchase analysis is provided in Section 8.c.(2) and Section 13.

3. Authority. This Circular is issued under the authority of 31 U.S.C. Section 1111 and the Budget and Accounting Act of 1921, as amended.

OMB Circular No. A-94: Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs (OMB) October 29, 1992

OMB Circular A-94, “Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs” (10/29/1992):

GAO Glossary of Terms and Definition (September 2005)

Discount Rate (Economics Term)

One of the following:

(1) The interest rate used to determine the present value of a future stream of receipts and outlays, or in cost-benefit analysis, of benefits and This use of the term is completely distinct from that in monetary policy, and the interest rates involved are generally not those charged by Federal Reserve Banks.

Discount rate policies of the three major oversight and budget agencies—the Government Accountability Office (GAO), the Office of Management and Budget (OMB), and the Congressional Budget Office (CBO)—are consistent with basic economic principles but vary significantly in their formulations for different analyses. GAO’s Discount Rate Policy (GAO/OCE-17.1.1), May 1991, describes different approaches and their applications.

In estimating net present values under credit reform, discount rate represents the average interest rate on marketable Treasury securities of similar maturity to the cash flows of the direct loan or loan guarantee for which the estimate is being made. (See Credit Subsidy Cost under Federal Credit.)

(2) The interest rate that a commercial bank pays when it borrows from a Federal Reserve Bank. The discount rate is one of the tools of monetary policy used by the Federal Reserve System. The Federal Reserve customarily raises or lowers the discount rate to signal a shift toward restraining or easing its monetary and credit policy. (See also Monetary Policy.)

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