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Fed Proposes Reforms to Credit Program

Monday, July 1, 2002

The Federal Reserve is requesting public comment on a proposed reform to the discount facility. Under the proposal, a primary credit program would be available to financially sound institutions for short periods, usually overnight.

Initially, the rate for this program would be set at 100 basis points above the intended target federal funds rate. Thereafter, Reserve Bank directors would propose the rate, subject to review and approval by the Board of Governors.

Under the reformed structure, institutions would be allowed to sell in the fed funds market while borrowing, which would limit volatility in the federal funds rate. This replaces the adjustment credit program, which is offered at a below-market rate and requires significant administration to prevent institutions from arbitraging on rate spreads.

The reformed proposal also includes a secondary credit program, which would be offered at 50 basis points above the primary rate. Such credit would be available—in appropriate circumstances—to institutions that do not qualify for primary credit.

This proposal will have no effect on monetary policy or the process by which the discount rate is set.