Fed Hikes Discount Window Rate
Federal funds rate remains unchanged
February 18, 2010
The Federal Reserve on Thursday increased its discount window rate by 25 basis points to 0.75%, but the central bank left its federal funds rate unchanged at a range of 0% to 0.25%.
The change in monetary policy comes as the central bank begins the process of reining in easy credit that was used to prop up the economy and help the financial system weather the credit crisis.
"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said in a statement.
According to the Fed, the central bank shortened the maturity for primary credit loans to overnight. That change will take effect on March 18.
The Fed's announcement had been clearly anticipated, according to economists at the Royal Bank of Scotland. With financial conditions improving, the Fed is now normalizing its lending facilities, according to analysts at the bank, who recalled that on Feb. 10 the central bank's chief, Ben Bernanke, said that "before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes ... should be viewed as further normalization of the Federal Reserve's lending facilities, in light of the improving conditions in financial markets."
Additionally, the Fed raised the minimum bid rate for the Term Auction Facility to 0.50% from 0.25%.
Before the financial crisis, the spread between the primary credit rate and the fed funds rate was 100 basis points. During the crisis, the spread between the primary credit rate and the fed funds rate was cut twice on different occasions to encourage banks to use the discount window as a source of liquidity.
The Fed said that the increase in the spread and reduction in maturity will spur depository institutions to rely on private funding markets for short-term credit and allow its primary credit facility to be used as a backstop source of funding.
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