What is the Fed Discount Rate ? And Art HoganThe discount rate, also known as the window discount rate or the discount window is the interest that the Fed charges any bank that borrows money from the Fed. It is called a discount rate although it is actually higher than the normal rate. There used to be a stigma attached to borrowing from the Fed at a cut rate so a few years back the Fed increased the rate to above the normal rate, saying that it was willing to lend money to banks but they would have to pay for it.
Now by cutting the discount rate by half a percentage point to 5.75% the Fed is making money more easily to the banks which have been suffering from the inability to get credit from each other .
This time round the Federal Reserve Board said it was acting to "promote the restoration of orderly conditions in financial markets." The Fed also increased the time period from overnight to 30 days.
The cut in the discount rate instead of the fed funds rate, indicates that the Fed believes problems are being experienced in the financial system, not in the economy as a whole. The reduction in the discount rate makes funds available to banks, without affecting consumer and commercial interest rates, although many people are now expecting a cut in the fed funds rates in September.
The timing of the cut, before the markets opened was also significant, as it meant that lots of people who were short (i.e. they were selling stocks they didn’t actually owned) were caught out as shares prices soared before they could buy them back.
Ben Bernanke also said he would take further measures as necessary, so shorters will need to be wary.
Art Hogan, who has an uncanny knack of getting things right, was just on CNBC saying that the message from the Fed is clear :- liquidity will be more readily available and less expensive, the Fed does not want problems in the finance sector to affect the economy. He doesn’t see this move as being a prelude to a base rate cut in September, as the Fed is still concerned about the weak dollar and inflation. This move gives the economy room to breathe and there will be a positive reaction near-term. Fed is saying it will act as necessary, there should be a bit of a bounce, but the move up will not significant until we get more clarity, which should be sometime in September, end of 3rd quarter, before we can decide where the bargains are – should not be much impact on consumers.
So wait till September although there should be a bounce over next few days. Jim Cramer says today will see the greatest Dow point move ever ! We shall see.
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