Fed Raises Bank Loan Rate

The Federal Reserve says improved financial market conditions allowed it to raise a key short-term interest rate. Officials are raising the discount rate by .25 percent to a still exceptionally low .75 percent. The discount rate is the rate at which banks can borrow directly from the Fed on a short-term basis. It's the first time the Fed has increased the discount rate in more than three years.

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LINDA WERTHEIMER, host:

NPR's business news starts with a surprise move by the Fed.

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WERTHEIMER: The Federal Reserve unexpectedly raised one of its interest rates, yesterday. It's the rate it charges banks for emergency loans. The move rattled markets, but the Fed says this was not part of a broader policy shift to tighten credit for businesses and consumers.

NPR's John Ydstie reports.

JOHN YDSTIE: The Fed said, yesterday, it had raised the so-called discount rate a quarter of a point to three quarters of one percent. The rate was sharply reduced back when credit markets were frozen making it easier for banks to get funds they needed to operate. Boosting the rate will encourage banks to borrow from each other and not the Fed.

But for the rest of us, raising the discount rate is largely a symbolic move says Mark Zandi of Moody's Economy.com.

Mr. MARK ZANDI (Chief Economist, Moody's Economy.com): Raising the discount rate will have no impact on things like mortgage rates, the rates we pay on our credit cards, home equity lines of credit, none of that will be affected. So no impact that you and I will see as consumers or business people.

YDSTIE: When the Fed does decide to raise interest rates for the whole economy, it will raise another rate, the federal funds rate. Zandi says that's not likely before the end of the year.

The Fed said boosting the discount rate was a response to continued improvement in financial markets.

John Ydstie, NPR News, Washington.

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