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’s going on with extra COVID-19 unemployment benefits?

It’s been weeks since President Donald Trump signed an executive memorandum that was supposed to get the federal government back into the business of topping up unemployment benefits, to $400 a week. Few states, however, are currently paying even part of the benefit that the president promised. And, it looks like, in most states, the maximum additional benefit unemployment recipients will be able to get is $300.

What’s the latest on evictions?

For millions of Americans, things are looking grim. Unemployment is high, and pandemic eviction moratoriums have expired in states across the country. And as many people already know, eviction is something that can haunt a person’s life for years. For instance, getting evicted can make it hard to rent again. And that can lead to spiraling poverty.

Which retailers are requiring that people wear masks when shopping? And how are they enforcing those rules?

Walmart, Target, Lowe’s, CVS, Home Depot, Costco — they all have policies that say shoppers are required to wear a mask. When an employee confronts a customer who refuses, the interaction can spin out of control, so many of these retailers are telling their workers to not enforce these mandates. But, just having them will actually get more people to wear masks.

You can find answers to more questions on unemployment benefits and COVID-19 here.

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