3  -4Implementation Tool 1: Discount Window Rate Sets a Ceiling At the top of the demand curve, we see the discount rate, which is the interest rate the Fed charges when it lends money to banks.5 The discount rate is an administered rate, or a rate set by the Fed, and it is one of the tools the Fed uses to implement monetary policy.
It sets a ceiling for the federal funds rate because banks, if they are in good standing and have collateral for the discount window loan, can always borrow overnight funds at the discount rate from the Fed. Therefore, they are not willing to pay a higher rate to borrow funds.