Injection (economics)
Encyclopedia
When a central bank makes a short term loan to a member institution it is said to be injecting liquidity. In the United States, the Federal Reserve maintains a target federal funds rate
for banks to loan money overnight to each other. If the lending banks are unwilling to offer enough credit at this rate, the central bank may step in and make loans itself through the discount window
. In this role, the central bank is operating as the lender of last resort
and is said to be injecting liquidity.
Federal funds rate
In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend...
for banks to loan money overnight to each other. If the lending banks are unwilling to offer enough credit at this rate, the central bank may step in and make loans itself through the discount window
Discount window
The discount window is an instrument of monetary policy that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions...
. In this role, the central bank is operating as the lender of last resort
Lender of last resort
A lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or 'too big to...
and is said to be injecting liquidity.