Interest rates

The discount window

The Federal Reserve's lending at the discount window serves two key functions:

· It complements open market operations in managing the re­serves market day to day and in implementing longer-term monetary policy goals.

· It facilitates the balance sheet adjustments of individual banks that face temporary, unforeseen changes in their asset-liability structure.

The role of the discount window in the conduct of monetary policy has changed substantially since the early years of the Fed­eral Reserve. In the 1920s, the discount window was the primary conduit for monetary policy and for the provision of reserves to the depository system. As U.S. financial markets developed, how­ever, providing reserves primarily through open market opera­tions became feasible and more efficient. As a result, discount window lending has for many years accounted for a relatively small fraction of total reserves.

Despite the comparatively small volume of borrowed reserves, the discount window remains an important factor in re­serves market management and in the broader implementation of monetary policy. It serves as a buffer in the re­serves market against unexpected day-to-day fluctuations in reserves demand and supply. When the demand for re­serves is unexpectedly high or the supply is unexpectedly low, banks can turn to the window for reserves. Thus, the availability of the window helps to alleviate pressures in the reserves market and to reduce the extent of unexpected movements in the federal funds rate. Moreover, adjustments to the basic discount rate can be important in signal­ing and implementing shifts in the Federal Reserve's monetary policy stance.

Apart from its role in monetary policy, discount window lending enables individual banks to adjust their balance sheets. Open market operations could not easily duplicate the discount window's role in facilitating certain balance sheet adjustments. Although discount window loans and open market operations have comparable effects on aggregate reserve availability, the loans are uniquely suited to the task of meeting the temporary liquidity needs of individual depositories. Conversely, open mar­ket operations are better suited to implementing the short-term adjustments to the availability of aggregate reserves that are nec­essary in conducting monetary policy.

The structure of interest rates charged on discount window credit has changed over the years. However, the rate for adjustment credit, which is the basic discount rate, has always been the most significant for monetary policy. Today, separate, market-related rates generally apply for seasonal credit and extended credit.

The basic discount rate that each Federal Reserve Bank charges on its loans is established by the Bank's board of directors, subject to review and determination by the Board of Governors. Originally each Federal Reserve Bank set its discount rate independently, to reflect the banking and credit conditions in its own District. Over the years, however, the transition from regional credit markets to a national credit market has gradually produced a national discount rate. As a result, the Federal Reserve maintains a uniform struc­ture of discount rates across all Reserve Banks.

The basic discount rate is adjusted from time to time, in light of changing market conditions, to complement open market operations and to sup­port the general thrust of monetary policy. Changes in the discount rate are made judgmentally rather than automatically and may somewhat lag changes in market rates. The imme­diate response of market interest rates to a change in the discount rate—the announcement effect—depends partly on the extent to which the change has been anticipated. If rates have adjusted in anticipation of a change in the discount rate, the actual event may have only moderate effects on market condi­tions. Generally, the response of market rates to a change in the discount rate will be largest when the market views the adjust­ment as signaling a basic shift in the stance of monetary policy. In­deed, given the generally small volume of discount window credit, the direct effect of a discount rate change on the funding costs of depository institutions is quite small. Thus, the effect of changes in the discount rate must be interpreted in the context of existing economic and financial conditions and in relation to other policy actions. For example, the response of market rates will also depend on actions taken in open market operations.

The basic discount rate is applied on all adjustment credit. Sur­charges above the basic discount rate have at times been applied to larger institutions that relied too frequently on adjustment bor­rowing as a source of funding. In 1980 and 1981, for example, the Federal Reserve applied a surcharge (varying between 2 and 4 percentage points) to adjustment borrowing by institutions hav­ing deposits of $500 million or more that appeared to be borrow­ing more frequently than necessary. The surcharges were intended to encourage these institutions to adjust their portfolios more quickly.

Before 1990, the basic discount rate also applied to all loans under the seasonal credit program. In early 1990, after careful review of the program, the Board implemented a market-related rate on sea­sonal credit. The move was designed to eliminate the implicit sub­sidy associated with the discount rate, which is a below-market rate, while still providing a reliable source of funds for institutions lacking access to national money markets. The market-related rate applied to seasonal credit is based on an average of recent federal funds rates and ninety-day certificate of deposit (CD) rates, but it is never less than the discount rate applicable to adjustment credit. The market-related rate is reestablished periodically.

At the discretion of each Federal Reserve Bank, the basic discount rate may be applied to extended credit loans for as long as thirty days. A flexible rate somewhat above market rates, and always 50 basis points above the rate charged for seasonal credit, is ap­plied to extended credit loans that are outstanding for more than thirty days. In practice, the flexible rate is often applied to ex­tended credit loans outstanding for less than thirty days.

Дата добавления: 2014-12-29