The Fed raised what banks pay to borrow in a hurry

The price of a fast loan from the Federal Reserve went up last week. On Wednesday 16 September the Board voted unanimously to raise the primary credit rate a quarter point, from 3.75 percent to 4.00 percent, effective the next day, with the federal funds target range moving to 3.75 to 4.00 percent. Five days after it took effect, on Tuesday 22 September, vice chair Philip Jefferson spoke at the New York Fed's Treasury market conference on how banks borrow there. Reuters, American Banker and the ABA Banking Journal covered it, American Banker setting it against a jumpy Treasury market and yields at their highest since the financial crisis. None of the accounts reviewed for this piece printed the rate.

Ten basis points over what

Primary credit, what a sound bank pays at the window, is now 4.00 percent. The Fed pays 3.90 percent on reserve balances left sitting with it, so a bank that borrows pays ten basis points more than it earns doing nothing. That is the rate penalty, not the full cost of using the window, and it is not a September development: primary credit has sat ten basis points above the reserve rate since 2021. The spread is structure, not news, which is the likeliest reason nobody wrote it down. The Standing Repo Facility's minimum bid rate is 4.00 percent as well, so both backstops are priced the same.

Jefferson's own argument was about frictions. The changes, he said, "help reduce the frictions that may make banks hesitant to use the window when they are healthy." He meant collateral, forms and arrangements. Not price.

How the borrowing works

A bank short of cash can sell assets or borrow against them; the window is the second. It pledges collateral — Treasury securities, or the business and mortgage loans on its own books — and takes a loan at 4.00 percent. Treasuries in a bank's Fedwire Securities account move electronically into its pledge account, so a bank whose forms are lodged can pledge late in the day and be funded that day. The point is to keep a bank from selling Treasuries into a market already sliding, which is how one firm's bad week becomes everybody's.

Jefferson said over 60 percent of loan requests now arrive through Discount Window Direct, the self-service portal the Fed launched in 2024. Requests used to go by phone or on paper to the local Reserve Bank; the portal carries a messaging feature banks use "in lieu of a phone call." Submissions are taken any hour of any day, but advance and payment hours close at 7:00 p.m. Eastern, and anything later waits for the next business day. Open all night for paperwork, shut all night for money.

What this has to do with a building in Lakewood

Changes to the Borrower-in-Custody program took effect on 8 September. A bank can pledge its own loan assets to the Fed — the commercial mortgages and business loans it holds — while keeping possession of the files. Most no longer need a pre-enrollment inspection.

What is pledged is the bank's loan, not the borrower's building. For an owner in Lakewood, Brooklyn, Monsey or Cleveland, nothing about the loan changes: same rate, same payment, same lender, same file. The file simply acquires a second reader.

The borrowing numbers, labelled

Primary credit outstanding was $6,879 million on Wednesday 16 September, a one-day level, on decision day. The weekly average for that week was $6,608 million, up $1,257 million on the prior week and up $1,956 million on the same week a year earlier. That roughly $2 billion rise against last year is in the weekly average, not the Wednesday figure. Nobody has explained it, and quarter-end does not explain a year-over-year move, so it is a level rather than a signal.

What to watch

Quarter-end falls on Wednesday 30 September, eight days after the speech. Jefferson said window use rises during periods of temporary upward pressure on money market rates, quarter-ends among them; he gave no figures. The H.4.1 releases dated 24 September and 1 October will show whether primary credit climbs above the $6.879 billion Wednesday level. Also open is the collateral work with the Federal Home Loan Banks, which Jefferson called "not just about crisis preparedness." No date.

The dates: program changes 8 September, rate vote 16 September, effective 17 September, speech 22 September, next figures 24 September, quarter-end 30 September.