When a bank borrows money from the Federal Reserve Bank (FRB), what rate does it pay?

When a bank borrows money from the Federal Reserve Bank (FRB), it pays the discount rate. The discount rate is the interest rate that the FRB charges commercial banks for short-term loans, typically for overnight borrowing. This facility acts as a safety net for banks, allowing them to meet their liquidity needs and stabilizing the banking system.

Using the discount rate promotes the effectiveness of monetary policy, as it influences the overall rate of interest in the economy. When the FRB adjusts the discount rate, it impacts the cost of borrowing for banks, which in turn affects the rates that banks charge their customers for loans.

In contrast, the federal funds rate refers to the interest rate that banks charge each other for overnight loans of reserves. The prime rate is a benchmark interest rate used by banks for lending to their most creditworthy customers, while the overnight rate generally pertains to specific lending scenarios and does not specifically address the rate for borrowing from the FRB. Therefore, the discount rate is distinctly associated with loans taken from the Federal Reserve, making it the correct answer.