The Federal Open Market Committee's cut of its key interest rate Tuesday will result in cheaper loans through the discount window as the central bank reiterated its commitment to fight the financial crisis through unusual tactics.
The Fed's move puts the discount rate for healthy banks at 0.5%. Until Tuesday, financial institutions were paying 1.25% for access to the discount window.
The Fed again avoided sinking the discount rate below the benchmark federal funds rate. The spread between the two rates remained 25 basis points, the gap that has been maintained since March.
Borrowing through the discount window totaled $233.1 billion on Dec. 10, a 6.3% drop from a week earlier.
As the Fed reduced the discount and fed funds rates, it also hinted that further big changes could be in the offing.
"The Fed will continue to consider ways of using its balance sheet to further support credit markets and economic activity," the central bank said in a statement.
The Fed's balance sheet has been transformed this year from a relatively sleepy tool to a key aspect of the central bank's response to the financial crisis. Lending to insurance giant American International Group Inc. and purchases of commercial paper and assets held by money market mutual funds have flowed through the Fed's balance sheet.
This expansion has been facilitated in part by attracting financial institutions to hold more reserves at the Fed. Banks held $777.8 billion at the Fed on Dec. 10. As of Tuesday, these reserves will earn interest payments of 0.25%.
