Alert February 23, 2010

FRB Increases Interest Rate Charged at Discount Window and Reduces Maturities of Discount Window Loans

In actions designed to bring borrowing from the FRB’s discount window closer to terms and conditions that prevail in a normal, stable economic environment the FRB announced that it would: (1) increase the primary credit rate at the FRB discount window to 0.75% from 0.50% effective February 19, 2010; (2) reduce the maximum maturity of most discount window loans to overnight (from maturities of 28 days) as of March 18, 2010; and (3) raise the minimum bid rate for the FRB’s Term Auction Facility (“TAF”) from 0.25% to 0.50%.  The FRB also announced that its final TAF auction will be held on March 8, 2010.  Primary credit is short-term funding provided by the FRB on a fully secured basis to depository institutions that are in a “generally sound condition.”  The FRB intends that primary credit be used by borrowing depository institutions as a backup source of funding. 

The FRB said that it was able to make these changes to discount window practices because of “continued improvement in financial market conditions.”  The FRB also noted in its announcement that is expects that as a result of these changes, depository institutions will use private funding sources (rather than the discount window) for normal short term credit needs.  Morever, the FRB stated that its changes in discount window rates and maturities are not expected to lead to tighter financial conditions for households and businesses “and do not signal any changes in the FRB’s outlook for the economy or for monetary policy.”