Historical interest rates discounts
How have the Historical interest rates discounts impacted the money markets?
The discount rate is the rate of interest rate that is charged by the Federal Reserve Bank when an eligible depository financial institution borrows funds for short term periods. The Board of Directors for each of the Reserve Banks would set the discount rate. This would ideally reflect the monetary and he fiscal position in that state or district. However over the years a national credit market has evolved and the discount rate that is now maintained by the Federal banks is actually a uniform discount rate.
The Historical interest rates discount is one of the instruments of the open market operations and influences the supply of money in the US. The US banks and other financial institutions are required to maintain certain levels of reserves with the Fed or maintain cash reserves. Usually these reserves are dependent on outstanding assets and liabilities with the Fed, but would be typically 105 of all the demand deposits that are maintained by the bank.
Bank influence on Historical interest rates discounts
The inter borrowing among the banks influences these discounts and is also a quick way of raising capital for the banks. For example, when a particular bank has to finance an infrastructure project and needs to arrange for capital at a short notice, it would arrange for the funds at a higher rate than the Fed funds rate or the rate equal to that.
So if the feds fund rate is increased, then the banks will find it more expensive to raise the capital and this will squeeze the capital in the market. This mechanism is used for squeezing out the excess capital from the market. Relaxing the fed funds rate will have the opposite effect.
If the Historical interest rates discounts are seen from 1952 onwards, then the rate was hovered below 2%, while in 1981, it touched 18% and above. In 2006, the Historical interest rates discounts was 45 and by 2008, the rate was between 0 – 0.25%.
When the interest rates are lowered, then the government will usually buy the government securities and increase the supply of money in the market. This will ensure that businesses get a boost and the money is pumped in the market to make the monetary situation better. The reverse will happened, when the money in the market needs to be pulled out. So during the times of recession, as is happening now, the, money supply is increased by lowering the feds funds rate.