Final answer:
Disintermediation occurs when depositors withdraw their funds from financial institutions, affecting the bank's ability to lend. The Federal Reserve's monetary policy, particularly through changes in the discount rate, can impact this process by influencing banks' borrowing behaviors and, in turn, their lending capacity.
Step-by-step explanation:
Disintermediation occurs when depositors withdraw their savings from depository institutions. This can create a situation where deposits are not sufficient enough to meet the demand for loans, leading banks to reduce their lending activities.
The Federal Reserve's monetary policy decisions, such as changing the discount rate, can indirectly affect disintermediation. Raising the discount rate may cause banks to call in loans to maintain reserves instead of borrowing from the Fed, thereby reducing the money supply and increasing market interest rates. Conversely, lowering the discount rate encourages banks to borrow more from the Fed and increase their lending activities, which can mitigate disintermediation risks.