Fed Cuts Discount Rate to 5.75% from 6.25%
The Fed has cut the discount rate to 5.75% from its current 6.25%. It has NOT cut the Fed Funds rate, keeping it at 5.25%. The Fed stated that it is prepared to “mitigate” adverse effects on the economy, stating that market conditions may “restrain economic growth”. It stated that “financial market conditions have deteriorated” and that downside risks to growth have increased “appreciably”. The Fed says that it will keep these changes until liquidity improves “appreciably”, and that they will “act as needed” to help the economy.
The discount rate had for many years been set below the FF rate, but in January 2003 it was set above the FF rate, thus acting as a penalty rate. At that time the FF target rate was 1.25% and there were two discount rates set, a primary rate set at +100 bp to FF and another set at +150 bp to FF. That means the current discount rates are 6.25% and 6.75%. Thus the Fed has today reduced the primary discount rate by 50 bp to 5.75%.
Total borrowing at the discount window was $265 mln in the latest week compared to $255 mln in the previous week, not much so far, showing the effect of current Fed liquidity injections. Free reserves (excess reserves minus borrowed reserves) totaled $9 bln in the latest week compared to a recent range near $1.5 bln, an indication of how accommodative the Fed has been.