Very peculiar. The discount window, in its current incarnation, is little more than tinsel on a Christmas tree: an ornament that serves relatively little practical purpose. So adjustments to the rate are relatively symbolic on the one hand, and carry few macroeconomic consequences on the other.
So the Bernanke Fed, faced with a stunning degree of illiquidity in short term money markets, decides to disappoint markets on a rate that carries relatively little macroeconomic risk but could provide a useful balm to confidence in the banking system.
If they were worried about moral hazard, why not do zero on Fed funds, but take the discount rate down 75? It wouldn't be hard to argue that that would be a more appropriate solution to the current situation than 25 on funds and a half-arsed 25 on the discount rate.
Is Macro Man alone in feeling that if Bernanke were a football manager, the hometown supporters would be singing "you don't know what you're doing" right about now?
So the Bernanke Fed, faced with a stunning degree of illiquidity in short term money markets, decides to disappoint markets on a rate that carries relatively little macroeconomic risk but could provide a useful balm to confidence in the banking system.
If they were worried about moral hazard, why not do zero on Fed funds, but take the discount rate down 75? It wouldn't be hard to argue that that would be a more appropriate solution to the current situation than 25 on funds and a half-arsed 25 on the discount rate.
Is Macro Man alone in feeling that if Bernanke were a football manager, the hometown supporters would be singing "you don't know what you're doing" right about now?
9 comments
Click here for commentsRe: disco - aguably they should have increased term to 90 from 30 days. That, coupled with a cut might have brought down term LIBOR/OIS spreads.
ReplyCan't start an overt run on dollar or would have to do something abt Euro complaints, and BWII refusals to move. Not Fed's problem on paper, but. . .
Replyis the problem really the level of rates? isnt it just as good to have 5% but borrow for 6 months?
Replyi think i am repeating what first poster said. i should know better, but can't they set the term as they wish?
Replyno one is using the discount window and i'm sure the Fed is actually pleased about that. i think cutting it flat or below Fed Funds WOULD increase moral hazard, if banks were to start using it. and couldn't you arbitrage between the discount window and fed funds if the discount window was lower? i'm no expert on this, so just asking.
ReplyAlso, any ideas why banks WOULDN'T borrow from the discount window if Libor rates were higher than it? i understand it's more stringent in that you have to post certain quality assets against it, but wouldn't banks do that all day long instead of paying more to borrow through Libor funding?
During the October meeting when double B and company cut 50 bps, I had anticipated 25 bps fed funds / 50 bps discount.
ReplyKind of surprised they have cut not the discount 25 bps and closed the gap between discount/fed funds already.
Double B is looking a bit inept in his ability to read the markets :/
People seem to understand that central planners in the former Soviet Union failed.
ReplyWhy is it that people are surprised when the central planners at the Fed also fail?
I'd concur that the term and collateral issues surrounding the discount window are probably just as important as the level of rates. So far, the Fed has whiffed on all 3.
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