Federal Reserve Discount Window

From MarketsWiki
Jump to: navigation, search
FTSE Russell banner 2016.gif

The discount window is an instrument of monetary policy that allows financial institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity. The interest on such loans is called the discount rate.

When the U.S. Federal Reserve System was established in 1913, lending reserve funds through its discount window was intended as the principal instrument of central banking operations. The window was superseded by open market operations as the most important tool of monetary policy, but it continues to complement the market, acting as a safety valve to relieve liquidity strains in particular institutions and the banking system as a whole.[1]

On Feb. 18, 2010, the Federal Reserve announced that it was raising its discount rate in order to push banks to borrow from the private market for short-term credit.[2] In a statement, the Fed said it would raise its discount, or primary credit rate, to 0.75 percent from 0.50 percent on Feb. 20, 2010.[3]

To reduce the stigma and give banks in need an added incentive to borrow from it, the Fed in August 2007 reduced the gap between the discount rate and the fed funds rate.

In the depths of the financial crisis in late 2008, Fed discount window loans exceeded $100 billion, but they eventually declined to less than $15 billion in the years that followed, and other emergency-lending programs also declined in use.[4]

References

  1. The Federal Reserve Bank Discount Window, Introduction. The Federal Reserve Discount Window.
  2. Fed Hikes Discount Rate, Says Not Tightening. MarketWatch.
  3. Press Release. FRB.
  4. Fed Raises Discount Rate Quarter Percentage Point. WSJ.com.