For three weeks in a row, banks have reduced their
borrowing from the lending program that the Federal Reserve
supplies emergency purposes. The Fed said Thursday that
commercial banks averaged $30 billion in daily borrowing over
the week that ended on August 27th, which is down $700
million from the previous week. This funding costs just
0.50%.
The discount rate is the interest rate charged to commercial
banks and other depository institutions on loans they receive
from their regional Federal Reserve Bank's lending
facility--the discount window. The names of the
institutions borrowing from the window are not published.
Prior to the summer of 2007, the Fed really only had two
tools to influence the credit markets. The Fed Funds
rate and the discount window. Since then, the Fed has
experimented with many different programs from the TAF to
expanded currency swaps to quantitative easing (buying of GSE
and TSY debt). Due to this activity, the Fed's balance sheet
has swollen from less than $900 billion in 2007 to today's
$2.1 trillion.
However, the drop in discount window borrowing coupled with a
drop in the lending for commercial paper exemplifies that
credit continues to improve throughout the US economy. This
highlights the looming decision the Fed will have to make on
when to begin the process to unwind their easing
programs.
Last night, Federal "The challenge my colleagues and I face
is navigating between the risk that early removal of monetary
stimulus snuffs out the recovery and the risk that protracted
monetary accommodation stokes inflation expectations that
could ultimately fuel unwelcome inflationary pressures."
Lockhart went on to say that it's important to condition the
markets to anticipate when the Fed will end the mortgage
buying program. This will be discussed at the upcoming Fed
meetings on September 15th and 16th.
As a matter of fact, all central banks and finance ministers
will likely be discussing this topic in the lead up to the
G20 finance ministers meeting in London on September
4th. For the markets, this becomes now a game of
anticipation of who will be the first to pull back from the
easing and who will be the first to raise interest rates. The
Bank of Israel appears to have jumped the gun when they
raised rates 25 bp to 0.75%.
However, this theme of pushing away from the monetary table
to reduce a swollen belly of stimulus will be on everyone's
plate going forward.
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