WASHINGTON — More than two years after slashing the discount rate to make sure banks had access to liquidity, the Federal Reserve Board said it will begin charging more for discount window loans beginning Friday.
As part of the central bank's push to return to normal operations, the Fed raised the discount rate to 0.75% from 0.5%, and said discount window loans would mature overnight.
Banks currently have 90 days to repay their loans.
In a statement released Thursday, the Fed stressed that the moves should not be interpreted as an indication that monetary policy might be tightened soon.
"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," according to the Fed's statement.
The Fed has begun a broad pullback from the dramatic interventions that characterized its response to the financial crisis.
On Feb. 1, it shuttered the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility and the Term Securities Loan Facility.
The central bank will stop purchasing debt and mortgage-backed securities from the government-sponsored enterprises at the end of March.
Before Congress approved the Troubled Asset Relief Program and the Fed launched dozens of liquidity programs, the discount window was a key component of the central bank's initial response to the financial crisis.
As global credit markets ground to a halt, the Fed on Aug. 17, 2007, cut the spread between the discount and federal funds rate to half a percentage point, from a full percentage point, and gave banks 30 days to repay their loans. On March 16, 2008, the Fed further slashed the spread to just a quarter of 1%.
With the federal funds rate currently resting at a maximum of 0.25%, the Fed's move on Thursday widens the spread to half a percent.
Despite the stigma that has long been associated with going to the discount window, banks started taking loans in droves. By the end of September 2008, the Fed was lending out more than $260 billion through the discount window.
On Thursday, the central bank said discount window lending over the past week totaled $87.7 billion. Most of those loans — $72.7 billion — are slated to mature in one to five years.
