Group 8 : – The FED GOVERNANCE –

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

– THE FED GOVERNANCE – (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.

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 :

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 ».


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