The Federal Reserve on Thursday took another step toward winding down its expansive efforts to prop up the financial system, raising the interest rate that banks must pay to take out emergency loans. Banks that need emergency funds through the Fed's "discount window" will now have to pay 0.75 percent, not the 0.5 percent they have been paying. But that higher rate probably won't mean higher borrowing costs for ordinary households and businesses, and the move does not represent an effort by the Fed to drain the money supply. That would be done by raising the federal funds rate, traditionally the Fed's main tool for managing the economy, above its current level near zero, or by raising the rate it pays on bank reserves, now 0.25 percent. "This move is part of the removal of unconventional measures and should not be seen as a signal of a change in the Fed's monetary policy stance," said Bruce Kasman, chief economist at J.P. Morgan Chase. The Fed also shortened the terms of discount-window emergency loans to banks and said it would wind down the Term Auction Facility, which pumps money into banks, on March 8. "With these changes, we expect that banks will use private sources for normal funding," turning to the Fed only as a backup source of funding, said Fed Governor Elizabeth Duke in a speech Thursday night. "I'd emphasize that the changes... represent further normalization of the Federal Reserve's lending facilities; they do not signal any change in the outlook for monetary policy and are not expected to lead to tighter financial conditions for households and businesses."
