BEECH BLOG

Here’s what’s being said about the Fed’s Discount Rate cut that occurred last Friday, Aug 17^th:

 

Traditionally, banks have looked down on borrowing from the Fed, seeing it as a sign of weakness. An Associated Press story yesterday mentioned that the Fed is trying to change that perception and is encouraging banks to borrow from it. Two officials "suggested use of the discount window would be viewed as a sign of strength." Read the story

 

One blogger states that analysts believe the cut in the Discount Rate has done little and that the "Fed will need to take more drastic action by cutting its benchmark interest rate soon if it fails to see more progress."  The Fed appears hesitant to take such action. 

 

Giving an opposing view, the LA Times states that the Fed "was ready to cut its much more influential federal funds rate if matters worsened." It also notes the call by Senator Ken Conrad of William Poole's resignation. William Poole is the President of the St. Louis Federal Reserve Bank. Read the story.

 

Providing what one might call a fair analysis, The Intangible Economy, states that we really can't know in so little time whether the Fed Cut was a good idea or not. The author backs this up by stating that the Great Depression and government's response to it are still being debated and that "Economics, lacking the controlled experiment, will always be a matter of interpretation." Read the story.  

 

To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.