Fed raised discount rate to 0.75 percent

The Federal Reserve surprisingly raised its discount rate by a quarter of a percentage point, to 0.75 percent from 0.50 percent, effective Friday, after holding interest rates to extraordinary lows for more than a year. The Federal Reserve discount rate is the interest rate it charges on short-term loans made to banks as a backup source of financing.


It was a clear sign that the era of extraordinarily cheap money was coming slowly to an end. The central bank will try to drain from the financial system some of the money it created to keep banks and the economy afloat over the last two years. And at some point it will begin putting upward pressure on interest rates by raising its benchmark fed funds rate, the rate at which banks lend to each other overnight.

The Fed’s action represents a widening of the spread between the discount rate and the upper end of the target fed funds rate. The two rates typically move in lockstep, and were a percentage point apart before the crisis.

In an effort to encourage banks to come to it for funds to maintain their stability during the crisis, the Fed sought to make borrowing from the discount window more attractive than usual. The Fed reduced the spread between the fed funds rate and discount rate to half a percentage point in August 2007 and then to a quarter point in March 2008. When the target range for the fed funds rate was lowered to zero to 0.25 percent in December 2008, the discount rate dropped to 0.50 percent, its lowest level since World War II.

After the announcement stock futures fell in after-hours trading; yields on 10-year Treasury notes rose about seven basis points, or seven-hundredths of a percentage point, to 3.8 percent; and the dollar gained slightly.