Record demand following Fed's decision: Before the interest rate hike...

The US Federal Reserve (Fed) had decided to raise the interest rate on loans provided to banks under the emergency lending program (Bank Term Funding Program - BTFP) that was launched following the emergence of the regional banking crisis last year.

RECORD DEMAND

The Fed had decided to raise the loan interest rates because banks had increased their demand in recent weeks. It was stated that before the interest rate was raised, banks made record demands for the emergency lending program. Accordingly, demand rose to approximately 6.3 billion dollars in the week ending January 24.

This means that borrowing through this program has increased by more than 50 billion dollars since mid-November. The Fed had announced that this borrowing interest rate would “not be lower” than the interest rate on reserve balances in effect on the day the loan was extended.

Before the increase, the BTFP borrowing rate was around 4.88 percent, approximately 52 basis points lower than the interest paid on reserve balances.

“JUSTIFIED IN MAKING THE CHANGE”

Ian Lyngen, Head of US Rates Strategy at BMO Capital Markets, said, “The Fed was right to make this change. From a monetary policy perspective, there was no point in this mismatch continuing.”

News Source: 12punto