Back to Assignment Attempts Keep the Highest / 2 10. The discount rate and the federal funds rate The Federal Reserves establishes the interest rate charged on funds it loans to banks and other financial institutions. A lower interest rate the incentive to borrow funds from the Federal Reserve, thereby the quantity of reserves in the banking system, which causes the money supply to When the Federal Reserve loans more funds to banks and another financial institutions, the quantity of reserves in the banking system and the money supply