Fed Promises Flow Of Credit To Homes And Businesses

The U.S. Federal Reserve has announced that it’s prepared to use its “full range of tools” to help households and businesses and stay on top of employment and price stability targets during the coronavirus crisis, according to a release.

“Federal Reserve lending to depository institutions (the ‘discount window’) plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy,” the release said. “By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress.”

The purpose of the window is to help credit flow. The board announced that it’s going to lower the primary credit rate by 150 basis points down to 0.25 percent, which will be effective as of Monday (March 16). 

“This reduction in the primary credit rate reflects both the 100 basis point reduction in the target range for the federal funds rate and a 50 basis point narrowing in the primary credit rate relative to the top of the target range,” the release said.

The move should help encourage more use of the discount window by institutions, and the board recently announced that financial firms could borrow from the window for as long as 90 days. 

Intraday credit is also available from the Fed and it “supports the smooth functioning of payment systems and the settlement and clearing of transactions across a range of credit markets.” The Fed encourages depository institutions to use intraday credit to help with the liquidity to households and businesses. 

The reserve is also encouraging banks to use their capital and liquidity buffers. “These capital and liquidity buffers are designed to support the economy in adverse situations and allow banks to continue to serve households and businesses.”  

Finally, the board has reduced the reserve requirement ratios to zero percent, a move that will be effective on March 26 when the next reserve maintenance period begins.

“This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses,” the release said.