Tuesday, February 23, 2010
Fed makes surprising move...
Late last Thursday night the Fed announced that they would be raising the interest rate it charges banks looking for emergency loans. The 25 basis points increase in the discount rate took it to 0.75%. This is a clear signal from the Fed that it thinks that there is some evidence that the US economy is really starting to recover Such a move had been expected at some point in 2010 but the timing caught the markets by surprise. As a result we saw a jump in the US dollar as well as some gains in the major stock market indices. We are probably some way away from a movement upwards in the far more significant Fed Funds Rate but some increase is possible in the early summer. For Fed watchers it is going to be an interesting year ahead.
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5 comments:
I agree that the rise in the discount rate signals that the Fed is trying to rein its easy monetary policy. This may be a first step towards the normalisation of the Fed’s lending facilities. Yet, at the same time Fed officials stressed that the move did not represent a tightening of monetary policy. Hence, the increase in the discount rate can be seen as a small technical change that does not carry broader signals about US monetary policy. But as this move was surprising (first rate change since December 2008) it certainly fuels the speculation of a rise in the federal funds rate in the near future.
But if this the change in the discount rate does not have significant implications - what were the main reasons behind this decision? According to the minutes of the January meeting of the FOMC this move reflects a balance of two objectives: encouraging depository institutions to use the discount window as a backup source of liquidity when they are faced with temporary liquidity shortfalls or when funding markets are disrupted, and discouraging depository institutions from relying on the discount window as a routine source of funds when other funding is generally available.
Stefan Engleder
As as part of fed's "exit strategy" and as hinted by Ben Bernanke this change(Increase in discount rate) is a move towards the future where fed is removing the extra ordinary support for the financial system considering US is coming out of recession, and the financial system is in no dire need to borrow cheap money through the Discount window when other sources are available.
I think it is more of a need now for Fed to go in this direction considering its balance sheet has bloated up from $800 bn to $2000bn during the crisis.
I agree that the interest rate hike in fed rate creates a shift in the global currency, commodity and the equity market, but it could be just a technical change that carries no additional message to the marketplace because discount rate increase did not symbolize a tightening of the United States monetary policies. I think these changes would not have a direct impact on the consumers but it is a technical change that makes a precondition for all other changes which is going to be seen in near future.
The Fed's decision to raise the interest rate for emergency loans from 0.5pc to 0.75pc, signalled it was starting to bring the monetary policies to the normal level.
Although the decision will not directly affect the main Fed funds rate, and will not affect the consumers directly. This increase will build the confidence in the market so that they can borrow from the short term money market rather than from the fed Which was the cheapest funds available.
It shows that the fed expects the market to be strong in the near future.
The FED funds rate is at 0.75%. This is a 25bp increase on the previous rate. The UK was one of the nations that were affected a lot during the recession. Today the UK is out of the recession, which is a good sign that the global recession is getting better. Thus the Federal Reserve is becoming stricter with the other banks, However it is true to say that a number of FED funds watchers were shocked because of the timing of this increase which they thought was a bit early. There will be transparency as to why they came to this decision; however the reason for the timing was to prepare the banks early on as it was highly likely that the global economy will improve.
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