Friday, May 17, 2002

Discount Rate Changes-The current Federal Reserve policy was to set the discount rate (the rate the Fed lends to banks in trouble) a half-percent under the Federal Funds rate (the rate banks lend overnight to each other). It looks like that will be changed to be a percent above the Fed Funds rate. This seems to make sence, as the old rules encouraged banks to take more risks, since the Fed would help them out at below-market rates if the needed liquidity. This will make banks think twice about overextending themselves. This might also have the effect of making the lending markets a little bit tighter, thus raising interest rates without having to actually raise them via open market actions. The Fed would be inclined to raise the Fed Funds rate given the recent spate of inflation, and this move might just allow them to skip a rate increase for the moment.

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