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
HTML EMBED:
COPY

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

Millions of Americans are unemployed, but businesses say they are having trouble hiring. Why?

This economic crisis is unusual compared to traditional recessions, according to Daniel Zhao, senior economist with Glassdoor. “Many workers are still sitting out of the labor force because of health concerns or child care needs, and that makes it tough to find workers regardless of what you’re doing with wages or benefits,” Zhao said. “An extra dollar an hour isn’t going to make a cashier with preexisting conditions feel that it’s safe to return to work.” This can be seen in the restaurant industry: Some workers have quit or are reluctant to apply because of COVID-19 concerns, low pay, meager benefits and the stress that comes with a fast-paced, demanding job. Restaurants have been willing to offer signing bonuses and temporary wage increases. One McDonald’s is even paying people $50 just to interview.

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Can businesses deny you entry if you don’t have a vaccine passport?

As more Americans get vaccinated against COVID-19 and the economy begins reopening, some businesses are requiring proof of vaccination to enter their premises. The concept of a vaccine passport has raised ethical questions about data privacy and potential discrimination against the unvaccinated. However, legal experts say businesses have the right to deny entrance to those who can’t show proof.

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