Which statement about Federal Reserve lending to banks is true?

The Federal Reserve (the Fed) acts as a lender of last resort for commercial banks through a mechanism called the "discount window." When a bank borrows from the Fed, the interest rate it is charged is known as the discount rate. This is a key tool of monetary policy. By borrowing directly from the Fed, banks can meet short-term liquidity needs, and the rate they pay is precisely the discount rate set by the Fed's Board of Governors.

A. Fed lending to banks follows an overall uptrend: Fed lending is not a steady trend; it spikes during financial crises when banks need liquidity and is otherwise low.

B. The discount rate is changed annually: The discount rate is changed as needed to implement monetary policy, not on a fixed annual schedule.

C. Banks set consumer interest rates at the discount rate: The discount rate influences banks' costs, but consumer rates are set higher based on market conditions, risk, and profit margins.

1. The Federal Reserve. (n.d.). The Discount Window. Federal Reserve Board. Retrieved from https://www.federalreserve.gov/monetarypolicy/discount-window.htm. The site states, "Depository institutions have, since the beginning of the Federal Reserve System, been able to borrow from the Fed's 'discount window'... The interest rate charged on these loans is the discount rate."

2. Mishkin, F. S. (2018). The Economics of Money, Banking, and Financial Markets (12th ed.). Pearson. Chapter 15, "Tools of Monetary Policy." The text describes discount policy and clarifies that the discount rate is the interest rate the Fed charges banks for discount loans.