In perhaps the most blatant sign to date that economic conditions are showing significant improvement, the Federal Reserve increased its primary credit rate for short-term bank lending, also known as the discount rate, for the first time in nearly two years.

The Fed announced that the "discount window" lending rate for banks in need of short-term loans from the government would be increased a quarter-point, from 0.5% to 0.75%, effective February 19, 2010. It's a move Fed Chairman Ben Bernanke hinted at before Congress, as reported in the Feb. 16 edition of NACM's eNews, and the first time the rate has changed since March 16, 2008. In essence, the Fed wants financial institutions to seek short-term credit from private market sources, as had typically been the case prior to 2008, when there was a negative stigma attached to borrowing from the Fed's discount window. At that time, such a move was characterized as a bank's option of last resort.

Still, the increase came as a shock to markets, as it widely was believed the discount lending rate would remain untouched until spring. The move is another in a line of recent mixed messages from a Federal Reserve that had been talking up its effort to become more clear and transparent. Among other similar seemingly contradictory gestures was Bernanke's strong hint during testimony earlier this month that an increase in the federal funds rate would be necessary in the near future to stave off inflation, while, moments later, noting the economy "continues to require the support of accommodative monetary policies."

Brian Shappell, NACM staff writer

 

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