Which activity of the Federal Reserve System directly impacts consumer credit rates?

The adjustment of the discount rate by the Federal Reserve System plays a pivotal role in influencing consumer credit rates. The discount rate is the interest rate charged by the Federal Reserve to commercial banks for short-term loans. When the Federal Reserve lowers the discount rate, it becomes cheaper for banks to borrow money. Consequently, banks are more likely to lower the interest rates they charge on loans to consumers, leading to a decrease in consumer credit rates.

Conversely, if the Federal Reserve raises the discount rate, borrowing becomes more expensive for banks, which often leads to higher interest rates for consumers as banks pass on those costs. Thus, the manipulation of the discount rate has a direct correlation with the interest rates that consumers encounter for various forms of credit, such as personal loans, credit cards, and mortgages, directly affecting their spending and borrowing behaviors.

This mechanism illustrates the Federal Reserve's influence on the broader economy by managing credit availability and influencing consumer expenditure through changes in the discount rate.