Fed Raises Discount Rate by 0.25%

123jump.com Staff
18 Feb, 2010
New York City

Federal Reserve increased the discount rate by 25 basis points as it unwinds several emergency measures taken during the last two years. The rate increase will widen the spread between federal funds rate and discount rate to 0.5%, still below the pre-crisis level of 1%.

[R]5:45 PM New York – Federal Reserve increased the discount rate by 25 basis points as it unwinds several emergency measures taken during the last two years. The rate increase will widen the spread between federal funds rate and discount rate to 0.5%, still below the pre-crisis level of 1%.[/R]

Federal Reserve increased discount rate by 25 basis points to 0.75% effective Feb 19 and kept the target rate for fed funds unchanged between zero and 0.25%.

With the widening of the interest rate spread between emergency lending rate and fed fund rates, the Fed is encouraging banks to rely on private markets like money markets and use the Fed facility only as a last resort.

The rate increase is one of several measures that the Fed is taking to begin the unwinding of emergency measures that were adopted in the last seventeen months.

The latest move is not likely to affect mortgage rates or interest rates charged by banks to each other to customers.

The Fed action is largely symbolic because banks borrow very little at the discount window. Generally bank use the facility only in emergency situation.

The Fed also shortened the terms of loans available to overnight lending after it had lengthened to 90 days at the peak of credit market crisis in March 2008.

Easing access to discount window and increasing the maximum maturity were the two initial steps that the Fed took in response to financial crisis in August and December 2007.

The Fed also increased the minimum bid rate for Term Auction Facility by 25 basis points to 0.50% and scheduled final auction on March 8.

The central bank had steadily lowered the spread between the federal fund rates and discount rate to 0.25% from the pre-crisis level of 1%.

Fed Governor Bernanke signaled that the central bank is prepared to return to normal monetary environment as financial markets regain their footing and economy improves.

During his testimony to Congress on Feb 10, Fed Chairman Ben S. Bernanke said investors should expect “moderate increase” in short period of time.

The statement released by the Fed noted, “The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.”