Federal Interest Rate: Can it go negative?

[Honesty]

I read earlier this week that the Fed still has tricks up its sleeve to boost the U.S economy. I’m not an economist but as I understand it, the amount that banks pay the Fed is called the discount rate and the amount us normal people pay to the bank is the market rate. The discount rate is 0 - 0.25 % which seems to be equivalent to the current mortgage market rate of approximately 3.2% (from a search on the Internet). I have two questions:

1. If banks must pay 0.25% (discount rate) on loans but charge customers 3.2% interest, that’s approximately 1250% in profit. Why isn’t this market rate considered excessive? Who decides the market rate a bank will charge customers and how is it determined? What would be the effect of hypothetically capping the market rate to 100% of the discount rate. That is, if the discount rate is 0.25, the most you can charge customers is 0.5%. Wouldn’t this spur hiring by reducing the interests on loans increasing revenues thus lifting the economy?
2. Can and has the interest rate gone negative? That is, has the Fed ever considered paying banks interest on funds borrowed? Would there be any negatives to this policy?
   Thanks.

• Honesty

[Exapno_Mapcase]

Repurchase Agreements with Negative Interest Rates

Contrary to popular belief, interest rates can drop below zero. From early August to mid-November of 2003, negative rates occurred on certain U.S. Treasury security repurchase agreements. An examination of the market conditions behind this development reveals why market participants are sometimes willing to pay interest on money lent.

Can the Fed Funds Rate Go Negative?

Yes. The idea that the Fed is now impotent and “out of bullets” are spreading, with one of the main supporting reasons being that the Fed funds rate is now targeted to a 0% to 0.25% range, and it can’t go lower.

Wrong. There is no law blocking the Bernanke Fed from targeting a negative Fed funds or discount rate. There is even a model of sorts from the Swiss banks in the 1970s that paid savers, especially flight money from a weakening U.S. dollar, negative interest rates. Americans who paid banks to hold their savings in Swiss francs more than made it back on the currency conversion back to the dollar.

It May Be Time for the Fed to Go Negative

[drachillix]

@Honesty

1. If banks must pay 0.25% (discount rate) on loans but charge customers 3.2% interest, that’s approximately 1250% in profit. Why isn’t this market rate considered excessive?

thats about $3K/year on a $100,000 loan, out of that $3K they pay leases, employees, utilities, repair and maintenance, all the same stuff any business does.

So for a million in paying loans you can have one mid grade bank teller.

Still sound excessive?

According to an aquaintance of mine, a typical bank actually profits around $1 per year for every $1K they have in deposits.

[IAmNotSpartacus]

Might make sense if banks only made money from the interest on loans. They have more ways of making money. First example, banks practice fractional reserve depositing, which is an obtuse way of lending the same dollar more than once. Second example, they sell loans they underwrite to organizations like Fannie Mae & Freddie Mac. Third example, credit cards and auto loans carry much higher interest rates than mortgages, and banks make money on every credit card transaction whether the borrower ends up paying interest or not. Fourth example, banks make lots of money on fees for checking & savings accounts, overdraft fees etc. Fifth example, investment banking and proprietary trading.

Bottom line is banks have a lot of ways to make money for themselves with other people’s money.