Originally published by 535 News
One of five task forces established by Federal Reserve Chairman Kevin Warsh last week will study ways to reach his goal to shrink the Fed’s balance sheet. As the task force’s work proceeds, a principal goal must be to assure banking system stability by addressing the stigma attached to the Fed’s discount window. Absent changes, one of the Fed’s most important tools for protecting our economy will remain hampered.
A fully functioning discount window would provide a safety valve as banks adjust to a shrinking Fed balance sheet. The Fed was created in 1913 to “discount” bank loans, turning them into a source of liquidity for banks. Those discount window loans helped banks meet depositor runs and helped the banking system flexibly meet swings in the demand for currency and credit. Today, the discount window is one of the Fed’s most powerful—and most underused—tools.
