Two Federal Reserve banks want higher rates on emergency loans

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The Federal Reserve won't send interest rates on emergency loans skyrocketing anytime soon. Image from Wikimedia Commons.

Throughout the recession, the Federal Reserve has kept overall interest rates hovering near zero, in order to keep deflation or further inflation from taking place. The 12 regional Federal Reserve Bank directors recently met, and one of the items for discussion was concerning the discount rate on emergency loans. A discount rate is basically the interest rate the Federal Reserve charges on loans to banks, and lately loans lent to banks have been low interest loans. Two Federal Reserve branches wanted rates raised, as recovery is too slow to justify the low rate.

Federal Reserve is keeping rates low

Part of the monetary policy that the Federal Reserve has been pursuing is keeping interest rates low, even on bank loans. Essentially, the bet is that if banks need to borrow money, the access to liquid capital is there and breathing room for a strained banking and finance industry is assured. However, signs of recovery are beginning to show, even though there is every indication that growth in the economy is going to be more modest than hoped, but that a return to more normal conditions seems to be under way.

Two Fed banks want higher rates

According to Bloomberg, directors of two of the 12 regional Federal Reserve banks asked for a slight raise of the discount rate for emergency loans to banks, but by less than one percentage point. The rationale is that recovery is slow, but is occurring, and therefore it is best to raise the rates sooner rather than later. Currently, a fast cash loan from the Fed comes with an interest rate of 0.75 percent. Not only that, but fewer banks are actually borrowing these days.

It won’t happen

It is only the Federal Reserve banks of Kansas City and Dallas that want higher rates, and the raise in mind was slight. It also wasn’t adopted. Bank rates will probably hold low for some time.



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