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<p>WASHINGTON-The Federal Reserve Board Governors announced May 17 that they were seeking public comment on proposed changes to the discount window programs, which offer additional liquidity to financial institutions to meet temporary liquidity needs. The Fed is proposing establishing `primary credit,’ replacing adjustment credit, which currently is extended at a below-market rate. Primary credit would be available at very short terms as a backup source of liquidity to depository institutions that are generally sound. Initially, the interest rate on primary credit would be set 100 basis points above the target federal funds rate. Thereafter, Reserve Banks would set the rate, subject to review and determination by the Fed. The primary credit program would mirror systems employed by many major central banks. Additionally, secondary credit would be available for institutions that do not qualify for primary credit at just 50 basis points above the primary rate. The Federal Reserve expects that, as a result of this reduced work by the agency in reviewing borrowers’ funding situations, institutions will be more willing to use the window when money markets contract, limiting potential volatility in the federal funds rate. Adoption of the proposal would not entail a change in the stance of monetary policy. The Federal Open Market Committee’s target for the federal funds rate would be unaffected. Comments are due 90 days after publication in the Federal Register, expected soon.</p>

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