Sunday, February 21, 2010
Fed raises emergency funding rate
In this news, it reports that the Federal Reserve raised the emergency funding rate from 0.25% to 0.75%. It analyzes that the move is largely symbolic, since banks do little borrowing at the discount window. Nevertheless, it points out that rising the discount rate allows Bernanke to take another step toward normal monetary policy. It also reports that the Fed shortened the term of some discount window loans and raised the minimum bid in the term auction in order to supply overnight funds to banks. To conclude, this move is one of the steps that Bernanke takes in order to prevent the excess reserves from fueling inflation, including the payment of interest on reserves and the sale of Fed assets.
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The effect of this policy will most likely be seen after the Term Auction Facility program (TAF) is terminated in March, since it replaced most discount window borrowing. This is one step that is supposed to fuel the recovery exit strategy planned by the Federal Reserve. According to current predictions by Bernanke, ideally this would normalize the feds lending conditions without causing financial strain on households and businesses.
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