WASHINGTON — In an unusual weekend announcement, the Federal Reserve Board said Sunday it narrowed the so-called "penalty rate" that has kept many banks away from the discount window.
The 25 basis point reduction brought the discount window rate to 3.25%, or a quarter point above the federal funds rate.
The Fed also said it authorized the Federal Reserve Bank of New York to create a lending facility that would help 20 investment banks provide financing to the securitization market. The Fed offered no details on the size of the facility for primary dealers but said it would be effective Monday and remain in place for at least six months.
The decisions are "designed to bolster market liquidity and promote orderly market functioning," the Fed said in a statement Sunday evening. "Liquid, well-functioning markets are essential for the promotion of economic growth."
The twin actions serve as further proof of the Fed's increasingly aggressive efforts to fight the credit crunch. Since March 7, the central bank has pledged to pump $400 billion into the economy. The central bank also helped orchestrate a bailout of Bear Stearns Cos. on Friday and said in a statement on Sunday night that it supports an agreement that allows JPMorgan Chase & Co. to purchase the struggling investment bank for $2 a share.
Since altering the structure of the discount window in 2003, the Fed held the rate at 100 basis points above the federal funds rate. When the credit markets first showed signs of strain in August, the Fed announced an emergency decision to cut the spread to 50 basis points.
But the impact of the cut has been negligible as banks have remained hesitant to borrow funds through the discount window because of a perception that such actions are a sign of weakness. In December, the Fed unveiled term loan auctions that provided a way for banks to seek funds by sidestepping the discount window's stigma.
Still, industry representatives have continued to argue that banks would remain reluctant to access the discount window until the Fed makes the loans available at or below market rates.
"If you want to get liquidity into the market, you need to get rid of this penalty," Keith Leggett, a senior economist at the American Bankers Association, said in December.
