GO
Loading...

Enter multiple symbols separated by commas

What is the Fed's Discount Window?

The U.S. Federal Reserve Friday it cut by a half point the primary discount rate, which governs direct loans from the Fed to banks.

The primary discount rate provides a borrowing safety valve for qualifying institutional borrowers.

The primary rate is now 5.75 percent, one-half a percentage point above the target for the federal funds rate, which is the Fed's benchmark short-term interest rate and its main tool to influence the economy.

The discount window was restructured in early 2003 to lift discount rates above the federal funds rate, which governs overnight loans between banks, and improve its operation as a policy tool and backup source of funds for banks.

The boards of directors of the 12 regional Fed banks can request changes in the discount rate, which then need to be approved by the Fed's board. The action taken on Friday came at the request of the boards of the New York Federal Reserve and the San Francisco Fed banks, and was approved unanimously.

In addition to the primary discount rate, the Fed also lends directly under two other discount window programs: secondary credit and seasonal credit.

Each is offered at a different rate, with primary credit usually extended only for very short periods of time and to borrowers in sound financial health.

Financial institutions that don't qualify for primary credit can request access to secondary credit to meet short-term liquidity needs, or to tackle serious financial problems.

The third category is seasonal credit, which is aimed at relatively small institutions experiencing seasonal swings in borrowing needs, like banks in farm communities.

In restructuring the discount window program in 2003, Fed officials hoped to break down the reluctance of institutions to borrow from the central bank, and believed the primary credit rate could provide a cap for the fed funds rate in times of financial market stress.

Contact U.S. News

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    Please choose a subscription

    Please enter a valid email address
    To learn more about how we use your information,
    please read our Privacy Policy.

Don't Miss

  • Dani Mathers, the 2015 Playmate of the Year, poses during a luncheon on the garden grounds of the Playboy Mansion in Los Angeles, May 14, 2015.

    Playboy on Thursday launched its completely safe-for-work mobile app Playboy NOW, part of a strategy to make more mainstream content.

  • Li Hejun, Hanergy Holding Group

    In the history of sudden wealth loss, Li Hejun may have set a new record.

  • Marc Cuban

    Ask Mark Cuban what the next big thing in technology is, you'll get an answer straight out of a science fiction film.

U.S. Video

  • Restoring relations with Cuba

    I never expected to get this far, says Carlos Gutierrez, Albright Stonebridge Group, discussing the road ahead in establishing an embassy in Cuba and possible stumbling blocks, including banking issues.

  • Central bank 'coddling' markets: Pro

    Mike Ryan, UBS chief investment strategist, and Anthony Chan, Chase chief economist, share their outlook on markets ahead of Janet Yellen's speech later today.

  • Summer stock moves

    CNBC's Dominic Chu takes a look at the old adage: "Sell in May and go away," to see if there are some stocks investors may want to put on summer retreat this year.