FRB Establishes Overnight Offering and Term Funding under Primary Dealer Credit Facility
Commentary by Steven Lofchie
The Federal Reserve Board ("FRB") established an overnight offering and term funding following the announcement that it will establish a Primary Dealer Credit Facility ("PDCF") designed to smooth market functioning.
As previously covered, the FRB will protect employment and price stability by supporting the flow of credit to households and businesses. Specifically, the FRB stated that it will impose a lower target range for the federal funds rate (from zero to one-quarter percent).
According to the FRB, the PDCF will also offer:
- overnight and term funding with maturities up to 90 days that will begin on March 20, 2020, for six months with the possibility of an extension;
- collateralization of credit for primary dealers by various investment grade debt securities and a broad range of equity securities; and
- interest rate charges that are the same as the primary credit rate or discount rate at the Federal Reserve Bank of New York.
Commentary
The FRB should consider expanding access to the discount window to broker-dealers other than primary dealers. Going forward, the FRB should consider formalizing the procedures by which it is opening the discount window to selected broker-dealers. That some broker-dealers, but not all, have access to the discount window is competitively unfair and puts added economic stress on those dealers not having access to the window. It is not inherently the case that only "better / safer" entities are primary dealers. There is a fair degree of randomness in the decision by any financial group to become a primary dealer, and of the selection within the group of the entity that is the primary dealer.