Small Call from Fed Branches to Change Discount Rate

The minutes from the meeting over the Discount Rate are out. They will not move the broad market in any meaningful way but it may ultimately matter to the large commercial banks. What the minutes will show you is that there remains at least some dissention in the Federal Reserve over how interest rates policies are impacting the banking system.

The Board of Governors voted over the summer to reestablish the existing rate for discounts and advances at 0.75% under the primary credit program.

Where the dissention is taking place (back in August) is in the Federal Reserve Bank of Boston, which voted for a rate of 0.5% rather than 0.75%, while the Federal Reserve Bank of Kansas City voted to set a rate of 1.00%. The minutes showed that no actions were taken and that the existing rate was maintained.

The discount rate would impact banks rather than consumers. Changing this rate without changing the Fed Funds rate can impact banks and lenders in their net interest margins.

The discount rate is the interest rate charged to commercial banks and other depository institutions on the loans which they receive from their regional Federal Reserve Bank's lending facility, which is also called the discount window. Federal Reserve banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit. Each has its own interest rate and all discount window loans are fully secured.

Again, this will not move the markets and for now it is not even enough of a jolt to show that major changes are coming to banks for their own borrowing costs.

JON C. OGG


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