Federal Reserve bumps up discount rate

The U.S. Federal Reserve decided Thursday to boost the rate American banks pay for emergency loans.

The action by the American central bank is part of a broader move to pull back the extraordinary aid it provided to fight the worst financial and economic crisis since the 1930s.

The move won't directly affect borrowing costs for millions of Americans. But with the worst of the financial crisis over, it brings the Fed's main crisis lending program closer to normal.

The Fed will bump up the so-called "discount" lending rate by one-quarter point to 0.75 percent. The increase takes effect Friday.

The central bank said the action should not be viewed as a signal that it will soon boost interest rates for consumers and businesses.The Fed repeated its pledge to keep interest rates at "exceptionally low" levels for an "extended period." Record-low borrowing costs of near zero are still needed to foster the recovery, it said.

The economy is growing again, and financial conditions have improved. But U.S. unemployment is still near double digits, and demand for loans remains weak. Many ordinary Americans and small businesses have found it difficult to borrow.

When credit virtually shut down in the U.S. in 2008, banks had nowhere to go except the Fed to borrow. Banks can now more easily tap private lending sources than they could then. As a result, the Fed feels comfortable boosting the rate banks pay on emergency loans.

Financial conditions improve

Because financial conditions have improved, the Fed also said Thursday it will shorten the length of emergency loans drawn from its emergency lending program. They will go back to overnight loans, effective March 18.

Earlier this month, the Fed shut down a handful of programs to help banks and other companies get access to credit.

Like those program shut down, the action announced Thursday is "intended as a further normalization of the Federal Reserve's lending facilities," the Fed explained.

"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or monetary policy," the Fed said.