Although new Federal Reserve rules were changed in 2003, in part to reduce the stigma of borrowing from the discount window, a stigma probably still exists. The Fed's Reserve Banks do not disclose the names of borrowers from the discount window, inferences might still be drawn from the location of the Reserve Bank that receives the request for a loan from the discount
window. Moreover, there is always the risk that information leaks out, even
though it would be improper.
The stigma of being seen as having to ask the Fed for money instead of the markets acts as a deterrence against its use. Only to prevent insolvency or to sustain the viability of operations would a company likely seek
substantial amounts of credit from the Federal Reserve.
Nevertheless, the cut in the primary lending rate to 5.75% closes the gap to the 5.25% fed funds rate, which should help reduce the stigma a bit. It is likely that the Fed will restore the percentage point-spread between the primary lending rate and the fed funds rate when credit conditions stabilize. Doing so would be a symbolic act signaling increased confidence in a return to normalcy in the financial system.
P.S. Will you be there when Cramer makes his next move?
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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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