In a largely symbolic move, the Federal Reserve increased the discount rate to banks by .25% on Thursday, sending the message to financial institutions that their ride on Easy Street could be coming to a dead end (the discount rate is the rate at which banks can borrow money from the government in an emergency).
But what will this mean for those of us on Main Street? According to many economists, not a whole lot. As The New York Times reported Thursday, "It was a sign that the threat of a collapse in financial markets — so real just a year and a half ago — had dissipated."
In raising the discount rate, the Fed has made loans to banks from the government less profitable as it flattens what is known as the yield curve — the difference between the yields and maturities of securities. The flatter the yield curve, the tighter the leash on banks' use of government-loaned money. In essence, it's the Fed's way of saying that banks no longer need the extra help the government has been giving them by keeping rates low.
Does this mean that consumers will soon be seeing rate hikes on mortgages and other bank loans? No, according to an Associated Press article, which cites the Fed's own assurances during the Thursday press conference.
So, perk up Average Joes, the government just gave you two reasons to smile — they're confident the economy is stabilizing and banks won't be getting a free pass anymore.
If you’re interested in learning how this news is affecting financial markets, check out this story on TheStreet.
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