On Fri, 17 Aug 2007, Doug Henwood quoted the Fed as saying:
> <http://www.federalreserve.gov/boarddocs/press/monetary/2007/200708172/default.htm>
>
> To promote the restoration of orderly conditions in financial
> markets, the Federal Reserve Board approved temporary changes to its
> primary credit discount window facility. The Board approved a 50
> basis point reduction in the primary credit rate to 5-3/4 percent, to
> narrow the spread between the primary credit rate and the Federal
> Open Market Committee's target federal funds rate to 50 basis points.
> The Board is also announcing a change to the Reserve Banks' usual
> practices to allow the provision of term financing for as long as 30
> days, renewable by the borrower. These changes will remain in place
> until the Federal Reserve determines that market liquidity has
> improved materially. These changes are designed to provide
> depositories with greater assurance about the cost and availability
> of funding. The Federal Reserve will continue to accept a broad range
> of collateral for discount window loans, including home mortgages and
> related assets.
The Fed so far seems to be exactly following the plan you've been predicting. They seem to be moving everything they can except the benchmark fed funds rate, as if to make clear that (1) they know there is danger, and are monitoring things closely, and (2) they are going to exhaust every other option before they move that rate. They seem to be making it clear that their optimal goal to get through this without moving that rate, and they will consider a big victory if they can.
I only have one question: am I just inexperienced in reading Fed news releases, or has there been an unusual emphasis on the discount window in the last two notices? Does this mark a change and return to earlier practice? My impression was that over the last couple of decades the discount window had become largely vestigial -- that no bank wanted to borrow from it because it would stigmatize it as troubled, and that its only remaining function was as a subtle sender of signals as to future tightening or loosening. But in these last few announcements, it sounds like they actually mean for it to be used, as a substantial alternative to lowering rates.
Michael