COVID-19

How the Federal Reserve’s “discount window” works

Amy Scott Mar 16, 2020
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The Fed also announced a cut in the discount rate in an attempt to stimulate the economy during the downturn caused by COVID-19. Mark Makela/Getty Images
COVID-19

How the Federal Reserve’s “discount window” works

Amy Scott Mar 16, 2020
The Fed also announced a cut in the discount rate in an attempt to stimulate the economy during the downturn caused by COVID-19. Mark Makela/Getty Images
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You don’t get much more big picture than the Federal Reserve on a Sunday afternoon pulling out all the stops. That huge cut in its short-term interest rate — another big bond buying program — echoes of the financial crisis, to be sure.

Also, the Fed cut something called the discount rate: short-term, emergency loans dispensed through what’s known as the discount window. What we’re talking about here is the Fed making some big moves to keep credit flowing to households and businesses.

Think of the discount window as a shot of WD-40. If a bank is short on cash to cover customer withdrawals or make loans, it can borrow money short term directly from the Fed.

“It’s in effect kind of keeping the financial system lubricated during a stressful time,” said Bert Ely, a banking consultant. He said the problem is that banks are reluctant to reach for the can.

Borrowing from the Fed is usually more expensive than borrowing from other banks.

And Joe Gagnon, senior fellow at the Peterson Institute for International Economics, said that looks bad.

“I mean, if a bank has to pay a higher rate to get credit, it’s usually because other banks are leery of lending to it,” Gagnon said. “So it looks like it might be in trouble.”

The Fed is trying to reduce that stigma by slashing the discount rate and by urging banks to use it.

If they say, ‘Well, please come, please come,’ which they also did during the financial crisis, then it’s like everybody’s doing it, and it’s OK, and it’s legitimate,” said Anat Admati, finance and economics professor at Stanford.

It could help that JPMorgan Chase recently said it plans to use the discount window to help break that stigma.

Gerard Cassidy, an analyst with RBC Capital Markets, said bank balance sheets are strong right now, partly because of nervous customers.

“There’s been an influx of deposits for the safety of the [Federal Deposit Insurance Corp.] deposit insurance, so I don’t think the banks are going to be forced to go to the discount window,” Cassidy said.

But he said it’s better to get them comfortable with the idea before there’s a real emergency.

COVID-19 Economy FAQs

What are the details of President Joe Biden’s coronavirus relief plan?

The $1.9 trillion plan would aim to speed up the vaccine rollout and provide financial help to individuals, states and local governments and businesses. Called the “American Rescue Plan,” the legislative proposal would meet Biden’s goal of administering 100 million vaccines by the 100th day of his administration, while advancing his objective of reopening most schools by the spring. It would also include $1,400 checks for most Americans. Get the rest of the specifics here.

What kind of help can small businesses get right now?

A new round of Paycheck Protection Program loans recently became available for pandemic-ravaged businesses. These loans don’t have to be paid back if rules are met. Right now, loans are open for first-time applicants. And the application has to go through community banking organizations — no big banks, for now, at least. This rollout is designed to help business owners who couldn’t get a PPP loan before.

What does the hiring situation in the U.S. look like as we enter the new year?

New data on job openings and postings provide a glimpse of what to expect in the job market in the coming weeks and months. This time of year typically sees a spike in hiring and job-search activity, says Jill Chapman with Insperity, a recruiting services firm. But that kind of optimistic planning for the future isn’t really the vibe these days. Job postings have been lagging on the job search site Indeed. Listings were down about 11% in December compared to a year earlier.

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