WASHINGTON — The Federal Reserve, taking its first step to normalize lending after more than two years of extraordinary actions to prop up the economy, on Thursday raised the interest rate it charges banks on emergency loans.
The Fed emphasized that the increase in the discount rate, to 0.75 percent from 0.50 percent, which will take effect on Friday, did not represent a broad tightening of credit. Instead, officials said, the change was intended to discourage emergency borrowing by banks and other deposit-taking institutions when other financing is available.
“The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy,” the Fed said in a statement.
The Fed is not expected to make changes in its fed funds rate — the benchmark interest rate — until later this year.
In addition, the Fed announced that the typical maximum maturity for lending from primary credit loans — in which banks borrow from the discount window — would be shortened to overnight, the historic norm, beginning March 18.
The Fed also raised the minimum bid rate for its Term Auction Facility — a temporary program started in December 2007 to ease short-term lending — to 0.50 percent from 0.25 percent.
The changes, which required approval of the Fed’s board of governors, were announced after the close of the markets but they had been signaled in discussions by the central bank’s main policy-making arm, the Federal Open Market Committee, at its last meeting in late January.
In August 2007, at the inception of the financial crisis, the central bank lengthened that maturity to 30 days, from overnight. It also widened the spread, or difference, of the discount rate above the federal funds rate to 0.50 percent, from 1 percent.
The discount rate fell to its current level in December 2008, at the same time the Fed lowered the target for the benchmark fed funds rate — the rate at which banks borrow from each other overnight — to zero to 0.25 percent.
“The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds,” the Fed said. “The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the one-half percentage point spread.”
Fed Raises Interest Rate That It Charges Banks - NYTimes.com
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