• Least Effective
• Least used (until now)

The Federal Reserve Bank Discount Window refers to the facility through which the Federal Reserve Bank makes secured loans to its member banks. The somewhat archaic term "Discount Window" originates from the days when banks did a considerable amount of their business through teller windows. Also, the Fed made these loans on a discount basis (They would advance the face amount of the loan less the discount, which amounted to the interest for the term of the loan. Essentially amounting to interest paid in advance.) I believe that most loans at the Discount Window now accrue interest like most other loans.

Historically banks have seldom borrowed at the Discount Window. The Fed generally limited access to the Discount Window to banks having special needs, e.g. a shortfall in reserves that a bank could not cover through the Fed Funds market.

Because of the complicated procedures involved in borrowing at the Discount Window banks don't like to use the facility unless they must.

The limited use of the Discount Window and the short-term nature of the loans have made it the least effective of the Fed's tools to influence reserve levels. Recently (over the last couple of years), however, the Fed has opened the Discount Window to more and more loan volume. They have greatly increased the volume of loans and expanded the acceptable collateral.

The mechanics by which loans from the Discount Window effect bank reserves work the same way as the purchase and sale of securities to and from member banks by the FOMC.