Fed Raises Discount Rate Quarter Percentage

By LUCA DI LEO And JON HILSENRATH

WASHINGTON—The U.S. Federal Reserve Thursday raised the rate it charges banks for emergency loans by a quarter percentage point, but emphasized that the step didn't represent a broader tightening of credit.



In a widely expected move, the U.S. central bank said the increase in the discount rate to 75 basis points from half a point was part of the Fed's steps away from its emergency-lending efforts. The increase will be effective from Friday.



"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities," the Fed said in a statement.



Fed officials had been signaling for some time that they intended to begin raising the discount rate as financial markets heal. They lowered this rate aggressively early in the financial crisis to give commercial banks added incentive to come to the Fed for emergency loans and continued to push it down as the crisis worsened. With the need for emergency funds waning, the Fed increased the rate from 0.5%.



In normal times, the discount rate is a percentage point above the more broadly important Fed funds rate, which is a rate that banks charge each other for overnight loans. The Fed targets a fed funds rate of between zero and 0.25%. The increase in the discount rate is a first step toward returning the gap between these two rates to the normal percentage point gap.



"The Fed will assess over time whether further increases in the spread are appropriate in view of experience with the half percentage point spread," the central bank said.



Fed officials have gone out of their way to avoid giving the impression that this step represented a broader tightening of credit. In the statement, the Fed said the move didn't "signal any change in the outlook for the economy or monetary policy" and that it is "not expected to lead to tighter financial conditions for households or businesses." Instead, it is being described by the Fed as a step away from emergency lending efforts.



In the depths of the financial crisis in late 2008, Fed discount window loans exceeded $100 billion, but they have since declined to less than $15 billion, and other emergency lending programs have also declined in use.



The Fed's discount window—also known as a primary credit window—was a quandary for officials in the early stages of the crisis. Many banks were reluctant to come to the Fed for overnight funds. There was a stigma attached to borrowing from the central bank which commercial bankers felt could worry their other lenders and customers.



To reduce the stigma and give banks in need an added incentive to borrow from it, the Fed in August 2007 reduced the gap between the discount rate and the fed funds rate. In another effort to get funds directly to banks, the Fed began providing credit through an auction program known as the Term Auction Facility. On Thursday, the Fed also raised minimum bids on these loans to 0.5% from 0.25%. These auctions, which grew to more than $400 billion at the height of the crisis, are being phased out in March.



A broader tightening of credit will occur when the Fed tries to move up the fed funds rate, something it has said won't happen for an "extended period," meaning at least several months.



Write to Luca Di Leo at luca.dileo@dowjones.com and Jon Hilsenrath at jon.hilsenrath@wsj.com