The attractive margins on commercial lending (a gaping three-point spread between the prime rate and the Federal Reserve discount rate) don't alter this gloomy picture.
But meanwhile, the Federal Reserve has cut the discount rate three percentage points since last September, and may lower it to two percent this week.
If QE2 succeeds, interest rates will eventually increase as the Federal Reserve will raise the discount rate to ensure economic growth and the likely resulting inflation does not overshoot its targets.
The markets are broadly anticipating that the Federal Reserve will lower the fed funds rate, as well as the discount rate, by 25 basis points later this afternoon, and there is little reason to think Wednesday's GDP figure will change that.
The Federal Reserve said Friday it has approved a half-percentage point cut in the discount rate - a dramatic move aimed at calming markets roiled by a widening credit crisis.
The discount rate is the rate that banks use to borrow from the Federal Reserve.
The Federal Reserve, lagging other central banks, pumped in extra money and then cut its discount rate to prevent a seizure of the financial system in the aftermath of the subprime mortgage market debacle.
The logic of a penalty discount rate is that the Fed prefers to let the rate structure ration Federal Reserve credit rather than having to do so administratively.
However, during unusual periods of reserve shortages in the banking system, the Federal Funds rate would be bid up above the discount rate and trigger borrowing from the Fed.
The Federal Reserve is preparing to narrow this spread, first by raising the rate it charges on loans through its discount window.
In fact, the Fed was established as a result of the Panic of 1907 and the discount mechanism and rate were the only tools of monetary policy given to the Fed in the Federal Reserve Act.
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