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:
- 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?
- 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?