Yesterday, the Federal Reserve announced that it had unanimously approved an increase in the discount rate from 0.50% to 0.75%, which the Federal Reserve indicated was “intended as a further normalization of the Federal Reserve’s lending facilities.” The discount rate refers to the interest rate that the Federal Reserve charges when it makes emergency loans to banks under its discount window lending programs. Yesterday’s announcement marks the first increase in the discount rate since June 2006.
The Federal Reserve also announced that it would reduce the typical maximum maturity for primary credit loans to one day. Primary credit loans are certain secured loans that Reserve Banks will extend to depositary institutions as a source of backup funds.
The Federal Reserve explained that these moves will “encourage depositary institutions to rely on private funding markets for short-term credit.” In addition to these changes, the Federal Reserve announced that it would increase the minimum bid rate for the Term Auction Facility (TAF) to 0.5%, and reduce the amount of the final TAF auction on March 8.
The federal funds rate, which is also controlled by the Federal Reserve, remains unchanged. Indeed, the central bank emphasized that it “anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The federal funds rate is the interest rate charges by banks when they make overnight loans to each other.
Earlier in the week, the Federal Reserve released the minutes from the January Federal Open Market Committee meeting. The minutes, along with Chairman Bernake’s recent testimony before the House Committee on Financial Services, reflect the Federal Reserve’s desire to chart an “exit strategy” from the extraordinary measures it was forced to take during the financial crisis and return to pre-financial crisis monetary policies. For example, the minutes reveal that staff “briefed policymakers about tools and strategies for an eventual withdrawal of policy accommodations,” and that most of the tools “would shrink the supply of reserve balances” and “shrink the Federal Reserve’s balance sheet.”