Monday, August 20, 2007

The Fed Discount Window Rate

For my first Financial blog entry, I think I'm going to try my hand at describing the Fed Discount Window Rate. This is a pretty important and timely topic to discuss considering the last week in the markets (volatility!).

The Discount Window Rate is a tool that the Fed uses to moderate the liquidity of funds in the market. Sometimes when a bank needs to borrow money to meet it's needs, it will borrow from other banks at a rate known as the "Fed Funds Rate". However, if money is not available from another bank, the bank in need could go to the Fed and borrow money at the Discount Window Rate.

This last week, the markets were rocked by the subprime mortgage mess. There was a lack of liquidity, or ability to convert assets into cash, because the global financial institutions were concerned about home buyers' ability to pay back loans. The markets dropped for several days in a row. Then this Friday, the Fed dropped the Discount Window Rate and extended the payback period to 30 days. Dropping the rate made it easier for banks to borrow emergency funds from the government.

Thus the confidence has been restored in the banks and the stock market, at least temporarily. Let's see what the markets and the Fed do on Monday morning now.

Since I'm new to blogging, any comments about my style are welcome. I'm still learning, so if any of my information is wrong, please let me know.

Also, I'd love to hear any readers insights into the market turmoil!

------Sincerely, Trevor Stasik.

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