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How the Federal Reserve’s “discount window” works

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I'm thinking the best way for us to frame things today. When just how different things are has now? Become so clear is do what we've done a couple of times. The past couple of weeks macro micro big picture to actual people in an economy that is coming to a very sudden stop. You don't get much more big picture of course than the Federal Reserve on a Sunday afternoon pulling out. Maybe not all but certainly a whole lot of the stops that had has that huge cut in their short-term interest rate that you have heard about Shirley and other big bond buying program echoes of the financial crisis to be sure also a cut in something called the discount rate short-term emergency loans dispensed through what is known as the discount window sounds a tad. We D I know but in reality it is so big picture because what we're talking about here is the Fed making some really big moves to keep credit flowing to households and businesses marketplace's. Amy Scott gets us going with what the discount window is and why it is so important in a crisis. Think of the discount window as a shot of. Wd Forty if advanced is short on cash to cover customer withdrawals or make loans it can borrow money short-term directly from the Fed in effect it's kind of keeping the finances lubricated during a stressful time banking consultant. Burt Ely says the problem is banks are reluctant to reach for the Kellyanne. Borrowing from the Fed is usually more expensive than borrowing from other banks and Joe Gagnon with the Peterson Institute for International Economics says that looks bad. I mean if a bank has to pay a higher rate to get credit it's usually because other banks are leery of landing to it so it looks like it might be in trouble. The Fed is trying to reduce that stigma by slashing the discount rate and by urging banks to use it and not add. Mahdi teaches finance and economics at Stanford. If they say well please come. Please come which they also did during the financial crisis. Then it's like everybody's doing it and it's okay and it's legitimate. It could help the J. P. Morgan Chase recently said it plans to use the discount window to help break that stigma. Gerard Cassidy an analyst with RBC capital markets says bank balance sheets are really strong right now partly because of nervous customers. There's been an influx of deposits for the safety of the FDIC deposit insurance. So I don't think the banks are going to be forced to go to the discount window but he says better to get them comfortable with the idea before. There's a real

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