Assuming that FED increased the Discount Rate in order to decrease the money supply growth...?

What would be the reaction in the Federa funds Market? What will happen to the Federal funds Rate and why?

Fed Funds Market: Instantaneous shift up
Fed Funds Rate: Instantaneous shift up

Why: The Federal Reserve controls the rate that the overnight deposit to the Federal Reserve (aka "The Bank of Last Resort") is at. Banks have a reserve requirement, toward which they try and minimize their reserves over the maximum. Anything above it is "safety cushion", which helps in solvency reserves but hurts in that it is foregone profits. Most banks do not loan out their cash to the Fed, but rather to other financial institutions for the excess reserve cash. However, the Fed is the bank of last resort, whereupon if no other banks are accepting overnight desposits, then the Fed will borrow. This rate sets the pace for all other rates, from overnight, which influences other short-term commercial rates, which then influences long term rates.

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