A Higher Discount Rate Doesn’t Mean Higher CD Rates, Savings Rates and Mortgage Rates

This past Thursday the Federal Reserve Board raised the discount rate one quarter percent to 0.75 percent. The discount rate is the rate banks pay for emergency loans. A higher discount rate doesn’t mean we will see higher CD rates, savings account rates and mortgage rates.

The change is part of the Fed’s action to normalize the Fed’s lending facilities. Now that the financial crisis is over and things are getting back to normal the Fed is pulling back the extraordinary liquidity it provided to get us through financial crisis.

The Fed also said the action won’t lead to tighter financial conditions for households and businesses and doesn’t signal any change in the outlook for the economy or monetary policy. The action won’t directly affect borrowing costs for millions of Americans.

The Fed said the steps taken shouldn’t be seen as a signal that it will soon boost interest rates for consumers and businesses. In the January FOMC meeting, the FOMC said it anticipates keeping the Fed funds rate in the targeted range of zero percent to one quarter percent for an extended period of time.