How low has the Federal Reserve's Discount Rate fallen in the past?
Has it ever fallen to zero?
The discount rate is the interest rate the Federal Reserve Banks set
on secured overnight loans to depository institutions. The Federal Reserve
Bank of New York's discount rate was 1.00 percent from August 1937 to
January 1948. That's still the lowest discount rate.
The discount rate is one of three monetary policy
tools used by the Federal Reserve to implement monetary policy. The other
two are the federal funds interest rate and changes in reserve requirements.
The Fed targets the federal funds rate; this is its most important monetary
policy tool. The discount rate is typically adjusted to complement open
market operations and monetary policy. Today reserve requirements are
rarely adjusted for monetary policy purposes.
The discount rate dropped to 1.25 percent in December 2001. (See
Chart.) The Board of Directors of the 12 Federal Reserve Banks lowered
the discount rate from 1.50 percent to 1.25 percent between December 11
and December 13, 2001. The last time the discount rate was lower than
1.25 percent was in January of 1948, when it was raised from 1.00 percent
to 1.25 percent.
A new Fed proposal may change how the discount rate is set. Under the
proposal the Federal Reserve would set the discount rate above the federal
funds rate. Using the Fed's current operating procedures, the discount
rate normally is 25 to 50 basis points (0.25 to 0.50 percent) below the
federal funds rate. The new proposal would set the discount rate above
the federal funds rate target and streamline the eligibility requirements
for borrowing to eliminate some of the nonpecuniary costs that presently
make banks reluctant to borrow from the discount window. For additional
detail please see, "Setting the Interest Rate," by Milton Marquis,
FRBSF Economic Letter, Number 2002-30, October 11, 2002.