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Many people know that the Federal Reserve sets interest rates in order to loan money to other banks so they can keep cash flowing throughout the U.S. financial system. Mostly, this works great for everyone involved. But, sometimes, banks and thrifts need a little extra cash, mostly so they can meet the reserve requirement (the minimum amount of deposits banks need to be considered in good financial shape).
To meet the reserve, the Fed has what's known as the discount window, which allows banks to borrow money for a short period of time at a higher interest rate (called the discount rate) than the official Federal Funds rate.
It's called a window because it used to be an actual teller window, where banks would go to borrow from the federal government. Now, it's used more as a lender of last resort. In fact, banks prefer to borrow from one another than directly from the discount window, since the interest owed can be cheaper and going to the discount window tends to imply that the bank is in a spot of trouble.
The Fed, too, doesn't like banks borrowing this way, which is why the discount rate is always higher than the target rate. It also requires banks to collateralize the loans, meaning they have to turn over liquid assets, such as loans or CDs, to the Fed in order to get the money. As with any loan, the banks get the underlying collateral back when they pay off the balance.
Home / Markets / Economy
Tuesday, March 25, 2008
March Consumer Confidence Tumbles to 5-Year Low
Associated Press
NEW YORK--Consumer confidence sank to a five-year low in March as tight credit markets, rising prices and worsening job prospects made
many worry that the economy has fallen into recession.
The Conference Board, a business-backed research group, said
Tuesday that its Consumer Confidence Index plunged to 64.5 in March from a revised 76.4 in February. That was far below the
73.0 expected by analysts surveyed by Thomson/IFR.
The index has been weakening since July, and is watched because
lower consumer confidence tends to result in lower consumer buying, which is a drag on the economy.
Lynn Franco, director
of the Conference Board's research center, said the latest index reading was the lowest since 61.4 in March 2003, just ahead
of the U.S. invasion of Iraq.
"Consumers' outlook for business conditions, the job market and their income prospects
is quite pessimistic and suggests further weakening may be on the horizon," she added.
There were steep declines in
two companion indexes.
The present situation index, which looks at current conditions, slumped to 89.2 in March from
104.0 the month before. The expectations index, which looks ahead, dropped to a 35-year low of 47.9 in March from 58.0 in
February. The last time the reading was that depressed was in December 1973, when it registered 45.2 amid the Arab oil embargo
and Watergate scandal, the Conference Board said.
In the expectations appraisal, a growing number of consumers said
they expected business conditions to worsen over the next six months. On the labor market, consumers expecting fewer jobs
increased to 29% in March from 28% in February, while those expecting more jobs declined to 7.7% from 8.9%.
The survey
by the New York-based Conference Board is based on a sample of 5,000 U.S. households.
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