Discount Rate

Discount Rate – (2.5%) The discount rate is the interest rate that banks borrow money from the Federal Reserve. These loans were always overnight loans to meet the reserve requirements that I talked about last time. Banks like to borrow money from each other before they become indebted to the government. So this money was typically used as a last resort for banks and the interest rate is typically 1% higher then the fed funds rate. Like the Fed funds rate, this interest rate has little to no importance to individuals other then knowing the current trend of the major interest rates. As these rates go up or down overall loan interest rates will go up or down accordingly, savings account interest rates change with them as well.

An important note is that all these rates can change independent of the others, it usually does not happen that way, but it can. The other thing is when you hear that the fed has changed the “rate”, make sure you find out what rate it is before you use that.

Recent changes to rates
Date Discount rate (change) Fed funds rate (change)
September 18, 2007 5.25% (-50bp) 4.75% (-50bp)
October 31, 2007 5.00% (-25bp) 4.50% (-25bp)
December 11, 2007 4.75% (-25bp) 4.25% (-25bp)
January 22, 2008 4.00% (-75bp) 3.50% (-75bp)
January 30, 2008 3.50% (-50bp) 3.00% (-50bp)
March 16, 2008 3.25% (-25bp) 3.00% (—)
March 18, 2008 2.50% (-75bp) 2.25% (-75bp)

Recent Changes – With the now named “Credit Crisis of 2007” the rules have changed a little. With major mortgage companies dropping like flies, the government has made some changes to try to help out the banks hoping in turn that will help out the consumer. The major change is that they loans can now be made for 30 days and not just overnight. You wouldn’t think that would make a big difference but it has actually been huge in keeping loans available and slowing the foreclosure rates for the already rampant rate. But it is only a band-aid but at least it isn’t salt.

Next we will talk about the ones that really matter, Prime Rate and Bonds!!!