Feb. 18, 2010 – 4:00 p.m. CT

Fed Raises Discount Rate in Attempt to Return to Normal

Moments ago, the Fed announced that it will raise the discount rate that it charges banks to borrow from 0.5% to 0.75%, effective tomorrow, Friday, February 19, 2010. The move is NOT intended to signal a change in monetary policy. Instead, it is hoped to encourage banks to raise funds from the private sector. Indeed, borrowing at the discount window has already tapered off quite significantly from its peak, which means that the Fed should not need to offer a subsidy for banks to borrow at the discount window. Historically, banks were charged a penalty for borrowing at the discount window. Hence, this move is more of a return to normal than any change in policy. Some also speculated that cheap, discount window borrowing was keeping banks from making riskier and higher interest rate loans to the private sector in recent months.

Again, the Fed STRESSED that this does not represent a change or signal a future change in monetary policy.

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