FED Funds/Discount Rate Spread — Flat or Flip?
The recent history of the FED FUND/DISCOUNT RATE spread is one of narrowing. The history of the spread adheres to the business cycle with the Discount Rate below FED Funds during recessionary times and above FED Funds during boom times.
This flip-flopping of rates usually lags a slowdown, but not by much. Will today’s decision cut the Discount Rate below the FED Funds rate?
FED Funds have priced in a 100bp rate cut; to get the discount rate under that, the FOMC would have to cut 150bps, assuming 25bp increments. To pull the Discount Rate in line with FED Funds, the FOMC must apply any FED Funds cut plus 25bps to the Discount Rate.
Remember, the Discount Rate gets pushed below FED FUNDS during slow growth/recessionary times, so it seems like a good time to push the Discount Rate sharply lower.