group 1: Analysis of the FED’s federal discount rates over the last 10 years

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they received from their regional Federal Reserve Bank’s lending facility. Through a discount rate chosen, a central bank can keep an eye on the multiplicity of the money available in the market. In fact, a huge discount rate means that the FED, for example, wants the money supply to decrease since the commercial bank will be more careful when lending or will be less incentive to take out a loan from the central bank. In that case, this commercial bank will make less loans and thus, follow some economic activities such as the investments will be less; then, the money supply will decrease. This tool as it is used by the Federal Reserve to control the money supply, is a key in this case for preventing inflation. If the Federal Reserve wants in the contrary increase the money in order to lead to an inflation, the discount rate will be low.

An Overview of the Discount Rates set from 2007 to 2017

This graph below describes the discount rate chosen by the FED for 10 consecutive years. From 2007 to now, rate has tremendously decreased; as it can be seen, it goes from 5.2 to 0.75. It must be remarked that this graph has 3 periods. The first period is from the year 2007 to 2009; this period portrays a big decrease of the discount rate. Next, the second period lasts for 7 years (2009-2015) and the rate did not change; in fact, it remains unchanged (0.5) from 2009 to 2015. The last one which begins in 2016 until now is subject to a slight increase.

Analysis of the FED’s federal discount rates over the last 10 years

 

  • First period (2007-2009):

The Fed had viewed the financial turbulence that had rocked financial markets over those last few weeks as primarily a liquidity crisis and not as an economic crisis. Since financial market conditions had deteriorated, and tighter credit conditions and increased uncertainty to have the potential to restrain economic growth going forward, the Federal Reserve Board approved a cut in the discount rate, the rate at which banks may borrow directly from the Federal Reserve, of 50 basis points to 5.75%. The Fed also announced that it was changing the standard terms of loans at the discount window to allow for borrowing up to 30 days

The reduction in the discount rate was the latest move by the Fed to provide liquidity to parts of money markets that need it.

  • Second period (2009-2015)

After the financial crisis and Great recession, the discount rate decreased a lot. It was equivalent to 2% in 2008 and it was only 0,25% in 2009.

Between 2009 and 2015 there is a stability between 0 and 1 percent of the rate, it is called the « period of 0 rate » or also an « above-market rate ».The fed fund rate tends to fall.

In 2010, the maximum term on discount window loans has been reduced back to overnight.

This monetary policy adopted a floor system. It promotes the efficient functioning of the financial system by allowing banks to earn the market rate of interest on all of their reserve balances.

This monetary policy is due to 2 things: because the Fed began paying interest on reserves. And also it purchased assets such as Treasuries through, which led to an important increase in the stock of reserves.

  • Third period (2015-2017)

Since the end of 2015, the discount rate of the FED has started to increase slowly. Indeed, by the beginning of February 2017, the rate is 0.75% compared to only 0.5% in 2016. Although this quarter percentage point of increasing seems weak, it shows the optimism of the FED and also that the American economy is going better.

This period represents the first raise of the discount rate of the decade. And in 2017, the FED anticipates 3 increases of its rate. Therefore, we can expect a sustainable rise for the following years.

 

External sources

https://www.fxstreet.com/analysis/fed-cuts-discount-rate/2007/08/17

http://www.cnbc.com/2015/12/16/fed-raises-rates-for-first-time-since-2006.html

https://www.stlouisfed.org/publications/regional-economist/april-2016/interest-rate-control-is-more-complicated-than-you-thought

https://www.wsj.com/articles/fed-raises-rates-for-first-time-in-2016-anticipates-3-increases-in-2017-1481742086

 

Group 6: FED’s Last 10 Years Discount Rates

This article aims to show you the evolution of the Federal Reserve’s discount rates over the last 10 years.

Nevertheless, before going into any details, let me briefly explain you what is the Federal Reserve and how it influences the economy.

What is the FED ?

The Fed is the gatekeeper of the U.S. economy. It is the bank of the U.S. government and, as such, it regulates the nation’s financial institutions. The Fed watches over the world’s largest economy and is, therefore, one of the most powerful organizations on earth.

« To promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates ». That is the Fed’s mandate and it clearly shows how it broadly impacts the US economy.

The Discount Rates are one of the FED’s main Tools to regulate the monetary system. Here is how they are used.

What are discount rates ?

The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. The rate that the borrowing institution pays to the lending institution is determined between the two banks; the weighted average rate for all of these types of negotiations is called the effective federal funds rate. The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target.

 

FED’s LAST 10 YEARS DISCOUNT RATES

 

For nearly six years, the Federal Reserve has held short-term interest rates at essentially zero to support the economy after the 2008 financial crisis. The severity of the Great Recession, and the Fed’s inability to lower interest rates below zero, led policy makers to use unconventional tools to stimulate the economy, such as quantitative easing (i.e., large scale asset purchases) and forward guidance. With strong employment gains and an improving economy, the Fed is now preparing the market for an eventual rate increase, perhaps as early as June 2015.

Past fed rate hike cycles

An exploration of past Fed tightening cycles starts with a review of how monetary policy adjustments work. One of the main tools Fed officials use to adjust policy is the federal funds rate. Whenever policy makers want to slow the growth rate of the economy and restrain inflation, they may raise interest rates, which is known as “tight”, “restrictive” or “contractionary” monetary policy. Conversely, whenever policy makers desire to spur the growth rate of the economy and increase the supply of money and credit, they lower interest rates, known as “easy”, “expansionary” or “accommodative” monetary policy.

Leading into the first rate hike

In most tightening cycles, inflation had either held steady, or only started to gradually rise after the Federal Reserve began to hike interest rates. It appears that the Fed’s decision to raise rates in each of the tightening cycles was driven by trends in the labor market and the central bank’s desire to be preemptive on the inflation front, rather than reacting to rapidly rising inflationary pressures.

References:

http://cammackretirement.com/knowledge-center/insights/lessons-learned-from-past-federal-reserve-tightening-cycles

https://fred.stlouisfed.org/series/FEDFUNDS

 

 

GROUP 20 Topic 3 – FED Discount Rate

 

A Brief Introduction:


The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility–the discount window. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.

A tight link between the equilibrium rate and growth is common in theoretical models. The Ramsey model relates the safe real rate to a representative consumer’s discount factor and expected consumption growth. So, too, does the baseline New Keynesian model, whose generalization is central to much policy and academic work. Thus these familiar models tie the equilibrium rate to the trend rate of growth in consumption and thus the economy. In those models, shifts in trend growth will shift the equilibrium rate. 

In other words, the equilibrium rate may be time varying. Such time variation is at the forefront of the policy debate.

The federal funds rate over time:

The effective federal funds rate is the interest rate at which depository institutions—banks, savings institutions (thrifts), and credit unions—and government-sponsored enterprises borrow from and lend to each other overnight to meet short-term business needs. The target for the federal funds rate—which is set by the Federal Open Market Committee—has varied widely over the years in response to prevailing economic conditions.

Comparing The Fed Funds Rate With The Primary Credit (Discount) Rate Over The Past Decade

Much has been said about the 25 basis point Discount Rate rate hike announced on Thursday. Some suggest that this was fully expected, priced in, and that to the Fed this is merely a technicality which will not impact the Fed Funds rate in the least. Others, such as Macro-Man, take a decidedly more pragmatic approach, and ask the simple question: if it really means nothing, why do it? « He » also goes on to suggest some possible trade ideas as a result of this action: we suggest checking out his post for further information.

Instead of speculating what the Fed may or may not do (we doubt even the Fed knows – as Krugman points out, the Fed’s action could be a function simply of what political party is currently in charge), we have decided to show a simple comparison of the Discount Rate and the Fed Fund rate over the past 10 years (chart below). A few things jump out: before the crisis started in 2007, the spread between the Fed funds target rate (5.25%) and the primary credit, aka discount rate, which was a 6.25%, was 100 bps. The first notable action that the Fed did vis-a-vis the discount rate was to cut it by 50 bps to 5.25% on the morning of August 17, 2007 (in the heyday of the quant implosion when the market was gyrating like a drunken sailor courtesy of busted quant models at GS Alpha and other core quant shops). The spread was subsequently cut to 25 bps on March 16, 2008, when Bear was unceremoniously handed over to JP Morgan for pennies on the dollar. It remained there until Thursday, when it has again moved to 50 bps.

Looking at the chart demonstrates that there has been not one period over the past decade when there was a substantial widening divergence ever since January 9, 2003, when the current discount rate system (primary, secondary) took over the old system in which adjustment credit, extended credit and seasonal credit were the primary forms of crediting available to depository institutions (which in itself is of course an anachronism – only some of the current Discount Window institutions are, in fact, depository institutions, but that is the topic of another rant). We encourage readers to take a look at 12 C.F.R. Part 201 and Part 204, which was the final ruling for conversion to the current discount rate system, it is a rather interesting analysis (not to mention the fact that prior to 2003, the discount rate was inside the Fed Funds rate, thereby allowing banks to arb the Fed once again, only in a different manner). But in summation, any increase in the primary credit rate has always been followed in parallel, or shortly thereafter, by an increase in the fed funds rate. Just how different will this time be?

As Stone McCarty points out « It is also probably not an accident that the announcement of tomorrow’s discount rate hike (and next month’s shortening of loan maturities) comes just after the release of the January 26-27 FOMC minutes. The discussion in those minutes further serves to underscore the technical, as opposed to policy, nature of today’s move. » Yet we think that there is more to this, as the Fed will sooner or later be forced to come face to face with a broken monetary system, in which it stands to lose all control should it not tighten in advance of a potential monetary supply explosion which would lead not only to hyperinflation (should the Fed gets its way, and consumers finally start borrowing), but also to full loss of the Fed’s control over the American monetary system. Keep a close eye on this chart: we are confident that the Fed Funds will be hiked before there is another unsymmetrical increase in the discount rate. Alas, the economy is far too weak to sustain a tightening posture at this point. As to what kind of aberrations in the market this action could lead to, we will investigate in the coming days and weeks. Even though the point of this work is to analyse the FED federal discount rate in those past 10 years, it is important to go further back to understand what happened before 2007. Between May 2000 and December 2001, the rate was decreased 11 times, falling from 6,5% to a low 1,75%. This created a flow of cheap liquidity now available for banks to borrow to households, thus laying the foundations of what would be know as the subprime crisis in 2008.

It became apparent in August 2007 that the financial market could not solve the subprime crisis on its own and the problems spread beyond the United State’s borders. The interbank market froze completely, largely due to prevailing fear of the unknown amidst banks. Northern Rock, a British bank, had to approach the Bank of England for emergency funding due to a liquidity problem. By that time, central banks and governments around the world had started coming together to prevent further financial catastrophe.

The subprime crisis’ unique issues called for both conventional and unconventional methods, which were employed by governments worldwide. In a unanimous move, central banks of several countries resorted to coordinated action to provide liquidity support to financial institutions. The idea was to put the interbank market back on its feet. The Fed started slashing the discount rate as well as the funds rate, but bad news continued to pour in from all sides. Lehman Brothers filed for bankruptcy, Indymac bank collapsed, Bear Stearns was acquired by JPMorgan Chase (NYSE:JPM), Merrill Lynch was sold to Bank of America, and Fannie Mae and Freddie Mac were put under the control of the U.S. federal government.

By October 2008, the Federal funds rate and the discount rate were reduced to 1% and 1.75%, respectively. Central banks in England, China, Canada, Sweden, Switzerland and the European Central Bank (ECB) also resorted to rate cuts to aid the world economy. But rate cuts and liquidity support in itself were not enough to stop such a widespread financial meltdown.

The U.S. government then came out with National Economic Stabilization Act of 2008, which created a corpus of $700 billion to purchase distressed assets, especially mortgage-backed securities. Different governments came out with their own versions of bailout packages, government guarantees and outright nationalization. The bill was, and still is highly controversial; it was seen by many as a ‘bailout’, and affected much of the American population through greater taxes. This has also caused a general distrust of banks, with many considering them ‘too big to fail.’

The Equilibrium Real Funds Rate: Past, Present and Future, by James D. Hamilton, University of California at San Diego and NBER – March 1, 2015

Sources:

www.federalreserve.gov

The 2007-08 Financial Crisis In Review | Investopedia http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp#ixzz4a0WNxVFk

http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp

Investopedia on Facebook

http://www.zerohedge.com/article/comparing-fed-funds-rate-primary-credit-discount-rate-over-past-decade

 

Group 18

Analysis of the FED’s federal discount rates over the last 10 years

 

The Fed uses the discount rate to control the supply of available funds, which in turn influences inflation and overall interest rates.

The more money available, the more likely inflation will occur.

That lowers the supply of available money, which increases the short-term interest rates. Lowering the rate has the opposite effect, bringing short-term interest rates down.
The board of directors of each reserve bank sets the discount rate every 14 days.
During the financial crisis that began in the summer of 2007, several adjustments were made to encourage institutions to borrow from the discount window including extending the maximum term on primary credit loans to 30 days in August 2007 and then to 90 days in March 2008. As of March 2010, the maximum term on discount window loans has been reduced back to typically overnight.

 

Groupe 11 – Analysis of the FED’s federal discount rates over the last 10 years

Federal discount rate:

The interest rate at which an eligible financial institution may borrow funds directly from a Federal Reserve bank. Banks whose reserves dip below the reserve requirement set by the Federal Reserve’s board of governors use that money to correct their shortage. The board of directors of each reserve bank sets the discount rate every 14 days. It’s considered the last resort for banks, which usually borrow from each other.

The Fed uses the discount rate to control the supply of available funds, which in turn influences inflation and overall interest rates. The more money available, the more likely inflation will occur. Raising the rate makes it more expensive to borrow from the Fed. That lowers the supply of available money, which increases the short-term interest rates. Lowering the rate has the opposite effect, bringing short-term interest rates down.

http://www.bankrate.com/rates/interest-rates/federal-discount-rate.aspx#ixzz4a0cBMVU2

The Discount Rate since 1950:

The Discount Rate for the last 10 years:

As can be observed in the first graph, the FED’s discount rate has been at a historical low since the 1950’s. Slowly growing since 2009, it remains at an incredible 1,25% to date.

The second graph clearly shows how the financial crisis of 2007/2008 forced the FED to lower the rate at which banks could borrow money. In an attempt to spark the economy by facilitating the flow of money in the country, the FED has maintained a very low rate since the crisis.

it is also interesting to note that between 2010 and 2016 theres was no hike of the discount rate (it stayed at 0,75%, a historical low). 2016 and 2017 however, represented a 0,25% hike respectively – symbolising economic stability and recovery.

https://fred.stlouisfed.org/series/INTDSRUSM193N

Janet Yellen, chairman of the FED testified before the Senate Banking Committee last Tuesday and the House Financial Services Committee Wednesday in her first semiannual monetary policy report to the new administration.

In her testimony, Yellen struck all the right notes:

    • The need to restore the federal discount rate — the interest rate charged to commercial banks for loans from their regional Federal Reserve Bank — as the active monetary policy tool again without waiting too long.
    • The plan to reduce the federal reserve balance sheet in a predictable and orderly manner after confidence that the discount rate is once again effective in affecting monetary policy is restored.
    • Commitment to work with any new regulatory supervision chief and the Treasury to reduce regulatory burden and support fiscal policy.
    • Fiscal policy should be good for the country and not bust our budget.
    • Loss of access to healthcare will have an impact on consumer spending.

So, where do we go from here? Depending on how the economy develops and how fast fiscal policy is shaped up and pushed through, the Fed might be able to affect three rate hikes this year. They will surely need more time to gain enough confidence to start reducing the federal reserve balance sheet.

http://thehill.com/blogs/pundits-blog/economy-budget/319866-fed-poised-for-3-rate-hikes-this-year-following-yellens

Group 9 – Analysis of the FED’s federal discount rates over the last 10 years

« The prime rate, as reported by The Wall Street Journal’s bank survey, is among the most widely used benchmark in setting home equity lines of credit and credit card rates. It is in turn based on the federal funds rate, which is set by the Federal Reserve.

The federal funds rate is the primary tool that the Federal Open Market Committee uses to influence interest rates and the economy. Changes in the federal funds rate have far-reaching effects by influencing the borrowing cost of banks in the overnight lending market, and subsequently the returns offered on bank deposit products such as certificates of deposit, savings accounts and money market accounts. Changes in the federal funds rate and the discount rate also dictate changes in The Wall Street Journal prime rate, which is of interest to borrowers. The prime rate is the underlying index for most credit cards, home equity loans and lines of credit, auto loans, and personal loans. Many small business loans are also indexed to the Prime rate. The 11th District Cost of Funds is often used as an index for adjustable-rate mortgages. »

« The Federal Reserve likes to keep the fed funds rate between 2-5 percent. It’s the sweet spot that maintains a healthy economy. That’s where the nation’s gross domestic product grows between 2 percent and 3 percent annually. It has a natural unemployment rate between 4.7 percent and 5.8 percent​. Price increases remain below the Fed’s inflation target of 2 percent for the core inflation rate. »

But now let’s have the look on the most historical changes of the FED’s federal discount rates over the 10 past years: the lowest interest rates were during the beginning of the 21st century: the interest rates and discount rates of the Unites States were around 1 percent per year. The highest interest rates were at the period of 2008, the period of the financial crisis: the interest rates and the discount rates were around 6 percent per year.

References

https://fred.stlouisfed.org/series/INTDSRUSM193N

https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135

Group 8 : – The FED GOVERNANCE –

  • Analysis of the FED’s federal discount rates over the last 10 years

– THE FED GOVERNANCE – 

www.investopedia.com/terms/d/discountrate (great video)

The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window.

The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.

The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate.

A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities.

  • Three discount rate practices by the Federal Reserve Discount Rate:
  • The primary credit rate is the basic interest rate charged to most banks. It’s higher than the Fed Funds rate. Here’s the current discount rate.
  • The secondary credit rate is a higher rate that’s charged to banks that don’t meet the requirements needed to achieve the primary rate. It’s typically a half a point higher than the primary rate. Here’s more on the primary and secondary programs.
  • The seasonal rate is for small community banks that need a temporary boost in funds to meet local borrowing needs. That may include loans for farmers, students, resorts and other seasonal activities. Here’s more on the seasonal discount rate program.

  • How the discount rate affects the Economy:

The discount rate affects all these other interest rates:

  • The interest rate banks charge each other for one-month, three-month, six-month and one-year loans.This is known as LIBOR, and it affects credit card and adjustable rate mortgage rates.
  • The rate banks charge their best customers, known as the prime rate. This then affects all other interest rates.
  • Savings accounts and money market interest rates
  • Fixed rata mortgages and loans are only indirectly influenced by the discount rate. They are mostly affected by the yields on longer-term Treasury notes.

https://www.thebalance.com/fed-funds-rate-definition-impact-and-how-it-works-3306122


http://www.frbsf.org/banking/discount-window/discount-rate/#2015

The crisis in 2008 caused irreparable consequences. Indeed, the intervention rates were deeply low. From 2000 to 2008 it was about 5 percent. Then, in 2008 until now, this rates is about 1%. We can observe those data on the following table :


http://www.lemonde.fr/economie/article/2016/12/15/la-fed-augmente-ses-taux-tout-en-restant-prudente-sur-la-future-politique-de-donald-trump_5049110_3234.html

The last news indicate that the FED is about to rise the intervention rates while remaining cautious to the economic situation due to the Trump governance.

After the end of two days of meetings, the Federal Reserve’s (Fed) central bank’s monetary policy committee (FOMC) not only decided to raise its key interest rates by a quarter of a point on Wednesday (December 14) Which range from 0.50% to 0.75%), but it also anticipates three increases in 2017, instead of two increases initially planned. This increase is the third, after December 2008 and December 2015.

This movement indicates that the FED is now more optimistic about the outlook of the American economy without showing the anticipation of the Trump’s decision.

At her press conference, Janet Yellen, the president of the Fed, tried to show that there was no runaway in her decision. Although it was unanimously adopted by the members of the FOMC, Ms. Yellen used a variety of expressions to temper interpretations.

« Growth is a stronger key, unemployment, a shade lower, » she explained. « We expect employment conditions to strengthen a bit more, » she said, while inflation continues to reach the 2 percent target for the Fed. As for the prospect of raising rates three times instead of two in 2017, Yellen described the change as a « very modest adjustment ».

 

Group 19- Analysis of the FED’s federal discount rates over the last 10 years

Federal Reserve System (FED)

The central bank of the United States is the FED. FED stands for Federal Reserve System but this is also referred to as the Federal Reserve for short. Although the FED is an independent government institution, the American central bank is owned by a number of large banks and therefore not by the state. The main governing body of the FED is the Board of Governors which consists of 7 members who are appointed by the President of the United States. In addition to the national FED there are 12 regional Reserve Banks. 5 representatives of these regional reserve banks together with the 7 members of the board of governors make up the FOMC (Federal Open Market Committee). The primary responsibility of the FOMC is to supervise open market operations through monetary policy. One important responsibility of the Federal Reserve is to safeguard the stability of the United States’ financial system. The FED also has various other functions, including:

  • ‘managing’ the national money supply by means of monetary policy with the aim of:
  • supervision and regulation of the private banks;
  • strengthening the United States’ position in the global economy;
  • preventing or resolving banking panics.

The Federal discount rate                                                   

The federal discount rate refers to the interest at which an eligible financial institution may borrow funds directly from a Federal Reserve bank. The Fed uses the discount rate to control the supply of available funds, which in turn influences inflation and overall interest rates. The more money available, the more likely inflation will occur.

In other words, the Federal Reserve discount rate is how much the U.S central bank charges its member banks to borrow from its discount window to maintain the reserve it requires. The Fed Board of Governors raised the rate to 0.75 percent on December 14, 2016.

There are three discount rates:

  • The primary credit rate is the basic interest rate charged to most banks.
  • The secondary credit rate is a higher rate that is charged to banks that do not meet the requirements needed to achieve the primary rate.
  • The seasonal rate is for small community banks that need a temporary boost in funds to meet local borrowing needs. That may include loans for farmers, students, resorts and other seasonal activities.

Analysis of the Federal discount rate over the last 10 years

The chart below shows a simple comparison of the Discount Rate and the FED Fund rate over the past 10 years. Few things jump out: before the crisis started in 2007, the spread between the Fed funds target rate (5.25%) and the primary credit, aka discount rate, which was a 6.25%, was 100 bps. The first notable action that the Fed did vis-a-vis the discount rate was to cut it by 50 bps to 5.25% on the morning of August 17, 2007 (in the heyday of the quant implosion when the market was gyrating like a drunken sailor courtesy of busted quant models at GS Alpha and other core quant shops). The spread was subsequently cut to 25 bps on March 16, 2008, when Bear was unceremoniously handed over to JP Morgan for pennies on the dollar. It remained there until Thursday, when it has again moved to 50 bps. Looking at the chart demonstrates that there has been not one period over the past decade when there was a substantial widening divergence ever since January 9, 2003, when the current discount rate system (primary, secondary) took over the old system in which adjustment credit, extended credit and seasonal credit were the primary forms of crediting available to depository institutions (which in itself is of course an anachronism – only some of the current Discount Window institutions are, in fact, depository institutions, but that is the topic of another rant).

Explanation of the discount rate increase: 

http://www.wsj.com/livecoverage/federal-reserve-december-meeting

http://www.bankrate.com/rates/interest-rates/federal-discount-rate.asp

http://www.global-rates.com/interest-rates/central-banks/central-bank-america/fed-interest-rate.aspx

https://www.frbdiscountwindow.org/Pages/Discount-Rates/Current-Discount-Rates.aspx

https://www.thebalance.com/federal-reserve-discount-rate-3305922

https://www.markettamer.com/blog/at-this-rate-analysis-of-the-impact-of-interest-rates-on-stock-prices#_ftn4

http://www.zerohedge.com/article/comparing-fed-funds-rate-primary-credit-discount-rate-over-past-decade

 

Group 14 – “Analysis of the FED’s federal discount rates over the last 10 years. »

“For nearly six years, the Federal Reserve has held short-term interest rates at essentially zero to support the economy after the 2008 financial crisis. The severity of the Great Recession, and the Fed’s inability to lower interest rates below zero, led policy makers to use unconventional tools to stimulate the economy, such as quantitative easing (i.e., large scale asset purchases) and forward guidance. With strong employment gains and an improving economy, the Fed is now preparing the market for an eventual rate increase, perhaps as early as June 2015.

Considering the timing and potential magnitude of the Fed’s next tightening cycle, we thought it instructive to look at how financial markets have behaved in past cycles for clues as to what might happen when the rate cycle does eventually turn.”

 

Past fed rate hike cycles

“An exploration of past Fed tightening cycles starts with a review of how monetary policy adjustments work. One of the main tools Fed officials use to adjust policy is the federal funds rate. Whenever policy makers want to slow the growth rate of the economy and restrain inflation, they may raise interest rates, which is known as “tight”, “restrictive” or “contractionary” monetary policy. Conversely, whenever policy makers desire to spur the growth rate of the economy and increase the supply of money and credit, they lower interest rates, known as “easy”, “expansionary” or “accommodative” monetary policy.

Over the last 30 years, five different tightening cycles have taken place. As seen in the following chart, interest rates have steadily declined during this period, where the interest rate in the current tightening cycle has peaked at a rate lower than in the prior tightening cycle. This is largely attributable to the Fed’s success in maintaining a low inflationary environment since the late 1980’s.

The chart below lists the Fed’s five most recent tightening cycles, detailing the timing and magnitude of rate increases once policy turned more restrictive. A quick calculation shows the federal funds rate rose by an average of 2.7% in the past tightening cycles and lasted for approximately one year. The only exception was the 2004 tightening cycle.

While each tightening cycle has been driven by different factors, past history may provide guidance on what to expect when rates eventually do head higher. As the old adage goes, history doesn’t repeat itself, but it often rhymes.”

 

United States Fed Funds Rate

The Federal Reserve likes to keep the fed funds rate between 2-5 percent. It’s the sweet spot that maintains a healthy economy. Price increases remain below the Fed’s inflation target of 2 percent for the core inflation rate.

The fed funds rate reached a high of 20 points in 1979 and 1980. That was to combat double-digit inflation.

In 1973, inflation tripled, from 3.9 percent to 9.6 percent. The Fed only doubled interest rates from 5.75 to a high of 11 points. Inflation continued to remain in the double-digits through all of 1974, lasting until April 1975. The Fed kept raising the fed funds rate to 13 in July 1974, and then dramatically lowered the rate, reaching 7 1/2 by January 1975.

The all-time low was 0.25 percent. That’s effectively zero.

The Fed lowered it to this level on December 17, 2008, the 10th rate cut in a little over a year. It didn’t raise rates until December 2015.

Before this, the lowest fed funds rate was 1.0 percent in 2003, to combat the 2001 recession. At the time, there were fears that the economy was drifting towards deflation.

 

The Federal Reserve kept the target range for its federal funds steady at 0.5 percent to 0.75 percent during its February 2017 meeting, in line with market expectations and following a 25bps hike in December. Policymakers noted the improvement in business and consumer confidence and the rise in consumer prices and said near-term risks to the economic outlook appear roughly balanced. Interest Rate in the United States averaged 5.81 percent from 1971 until 2017, reaching an all time high of 20 percent in March of 1980 and a record low of 0.25 percent in December of 2008.

 

In October, the most recent month for which data is available, the annual U.S. inflation rate was 1.6 per cent, and it hasn’t been above the two per cent threshold that the Fed like to see since 2014. So its hiking its rate in an attempt to nudge inflation higher.

« In the most expected policy decision in recent memory, the only real surprise was the move up in the FOMC members’ expectations for future policy, » TD bank economist James Marple said.

« The move up is a signal that the Fed has become more confident in the economic outlook and that inflation will increasingly track closer to the two per cent target. »

Wednesday’s news marks the first time the U.S. central bank has raised its benchmark lending rate in almost a year. It’s also the first time the U.S. central bank has had a higher rate than Canada’s since 2007.

Last week, the Bank of Canada opted to keep its benchmark lending rate steady for the 11th consecutive time, at 0.5 per cent.

Fed May Raise Rates Soon

The US economy is expected to continue to expand at a moderate pace and wait too long to raise rates would be unwise, Fed Chair Yellen said in prepared remarks to the Congress. However, the economic outlook and fiscal policy face uncertainty and monetary policy is not on a preset course thus any changes will depend on incoming data, Fed Chair added.

References

  

United States Fed Funds Rate | 1971-2017 | Data | Chart | Calendar. (n.d.). Retrieved February 28, 2017, from http://www.tradingeconomics.com/united-states/interest-rate

http://cammackretirement.com/knowledge-center/insights/lessons-learned-from-past-federal-reserve-tightening-cycles

https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135  

http://www.cbc.ca/news/business/federal-reserve-interest-rate-1.3896402 

 

GROUP 12 – Federal Reserve System (FED)

The Fed’s control over monetary policy stems from its exclusive ability to alter the money supply and credit conditions more broadly. Normally, the Fed conducts monetary policy by setting a target for the federal funds rate, the rate at which banks borrow and lend reserves on an overnight basis. It meets its target through open market operations, financial transactions traditionally involving U.S. Treasury securities. Beginning in September 2007, the federal funds target was reduced from 5.25% to a range of 0% to 0.25% in December 2008, which economists call the zero lower bound. By historical standards, rates were kept unusually low for an unusually long time. In December 2015, the Fed began raising interest rates and expects to gradually raise rates further.

The Fed influences interest rates to affect interest-sensitive spending, such as business capital spending on plant and equipment, household spending on consumer durables, and residential investment. In addition, when interest rates diverge between countries, as is the case now, it causes capital flows that affect the exchange rate between foreign currencies and the dollar, which in turn affects spending on exports and imports. Through these channels, monetary policy can be used to stimulate or slow aggregate spending in the short run. In the long run, monetary policy mainly affects inflation. A low and stable rate of inflation promotes price transparency and, thereby, sounder economic decisions.

While the federal funds target was at the zero lower bound, the Fed attempted to provide additional stimulus through unsterilized purchases of Treasury and mortgage-backed securities (MBS), a practice popularly referred to as quantitative easing (QE). Between 2009 and 2014, the Fed undertook three rounds of QE. The third round was completed in October 2014, at which point the Fed’s balance sheet was $4.5 trillion—five times its pre-crisis size. Although QE has ended, the Fed has maintained the balance sheet at its current level for the time being, with the intention of reducing it to a more normal size in the long run. The Fed has raised interest rates in the presence of a large balance sheet through the use of two new tools—by raising the rate of interest paid to banks on reserves and by engaging in reverse repurchase agreements (reverse repos) through a new overnight facility.

The Fed “anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” Thus, although rates are being raised, the Fed plans to maintain an unusually stimulative monetary policy for the time being. In terms of its mandate, the Fed believes that unemployment has reached the rate that it considers consistent with maximum employment (although other labor market indicators suggest some slack remains), but inflation has remained below the Fed’s 2% goal since 2013 by the Fed’s preferred measure. Debate is currently focused on how quickly the Fed should raise rates. Some contend the greater risk is that raising rates too slowly will cause inflation to become too high or cause financial instability, whereas others contend that raising rates too quickly will cause inflation to remain too low and choke off the expansion.

Sources: https://fas.org/sgp/crs/misc/RL30354.pdf; https://fred.stlouisfed.org/series/INTDSRUSM193N;