Fed reduces rates paid to Reserve Banks on primary, secondary credit

The rates depository institutions must pay the Federal Reserve Banks for primary and secondary credit extensions were both reduced by a quarter percentage point in July and were applicable Aug. 1, according to a Federal Register notice scheduled to publish Monday.

The Federal Reserve Board approved the change in the primary credit rate, which was reduced to 2.75%, on July 31. The board also had previously approved the renewal of the secondary credit rate formula, which is the primary credit rate plus 50 basis points. With the primary credit rate change, the secondary credit rate in effect at each of the 12 Federal Reserve Banks decreased from 3.5% to 3.25%.

The Federal Reserve Banks make primary and secondary credit available to depository institutions as a backup source of funding on a short-term basis, usually overnight. The primary and secondary credit rates – the interest rates the Reserve Banks charge for these extensions of credit – are established by the boards of the Federal Reserve Banks, subject to the review and determination of the Fed Board.

As is the case with a related change in Regulation D reserve interest rates, the quarter percentage point decrease in the primary credit rate was associated with a decrease in the target range for the federal funds rate (from a target range of 2.25% to 2.5% to a target range of 2% to 2.25%) announced by the Federal Open Market Committee July 31, the notice states.

The primary and secondary credit rates are published in the Fed’s Regulation A.

Regulation A: Extensions of Credit by Federal Reserve Banks