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The continuity of the discount rate

FRED data provide a window into financial history

When a commercial bank borrows from its District Federal Reserve Bank, it is using the Fed’s discount window. As described by the Board of Governors, this lending program provides commercial banks with short-term liquidity to support the smooth flow of credit to households and businesses. The operation of the discount window has evolved in response to the changing needs of the economy and financial system, and this FRED Blog post looks at its history through the lens of data.

The FRED graph above shows the interest rate that financially sound commercial banks pay when borrowing from the Federal Reserve. It is called the “discount window primary credit rate” because it offers the best credit terms to qualifying depository institutions. The daily data series starts on January 9, 2003, when the primary and secondary discount window program started making liquidity available to more commercial banks under different terms and at different costs. The source of the data is the Board of Governors.

But the discount window has been in operation since 1914, when the Federal Reserve System was established. Do you want to know how this tool of monetary policy operated further back in time? Keep on reading.

Before the primary and secondary credit programs were put in place, the Fed determined access to short-term liquidity for commercial banks through the adjustment and extended credit programs. There was and still is a third, seasonal  credit program not discussed here. The FRED graph above adds a second line (in red) to our initial graph. It shows the monthly average discount rate on loans to member banks and it extends the data back in time to January 1950. Note that the data source is listed as the International Monetary Fund, but the original data are reported by the Board of Governors through the Data Download Program.

Between 1914, when the Federal Reserve System was established, and the first half of 1922, when Federal Reserve District banks started buying large amounts of government securities in the open market, management of the discount window was intended as the principal instrument of central banking operations.

The FRED graph above adds a third line (in green) to our second graph. It shows the values of the basic discount rate that the Federal Reserve Bank of St. Louis charged to its member banks between November 16, 1914, and the launch of the primary and secondary discount window program in 2003. Notice that the data have no consistent frequency, as they were recorded only when the interest rate changed. Subject to approval by the Board of Governors, each of the 12 Reserve Banks in the Federal Reserve System can set its own discount rate. In practice, since the 1930s, the rates of the 12 Reserve Banks have rarely differed, and then only for a day or two. However, before 1933, there were more often differences in the rates across the Banks.

How these graphs were created: To create the first graph, search for and select “Discount Window Primary Credit Rate.” To create the second graph, from the “Edit Graph” panel, use the “Add Line” tab to search for and select “Interest Rates, Discount Rate for United States.” To create the third graph, repeat the last step to add “Federal Reserve Bank of St. Louis Basic Discount Rate (DISCONTINUED)” to the graph.

Suggested by Diego Mendez-Carbajo.

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