Fed Discount Rate
Fed Discount Rate – The U.S. Federal Reserve Thursday raised the rate it charges banks for emergency loans by a quarter percentage point, but emphasized that the step didn’t represent a broader tightening of credit.
In a widely expected move, the U.S. central bank said the increase in the discount rate to 75 basis points from half a point was part of its step away from its emergency-lending efforts. The increase will be effective from Friday.
“Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the Fed said in a statement.
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Fed officials had been signaling for some time that they intended to begin raising the discount rate as financial markets heal. They lowered this rate aggressively early in the financial crisis to give commercial banks added incentive to come to the Fed for emergency loans and continued to push it down as the crisis worsened. With the need for emergency funds waning, the Fed increased the rate from 0.5%.
In normal times, the discount rate is a percentage point above the more broadly important Fed funds rate, which is a rate that banks charge each other for overnight loans. The Fed targets a fed funds rate of between zero and 0.25%. The increase in the discount rate is a first step toward returning the gap between these two rates to the normal percentage point gap.
“The Fed will assess over time whether further increases in the spread are appropriate in view of experience with the half percentage point spread,” the central bank said.
Tags: Basis Points, Closure, Commercial Banks, Emergency Funds, Emergency Loans, Fed Discount Rate, Fed Funds Rate, Fed Officials, Federal Reserve, Financial Crisis, Financial Markets, Gap, Normalization, Overnight Loans, Percentage Point, Point Gap, S Central, Targets
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