Fed Surprises Markets With Hike To Discount Rate
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The Federal Reserve delivered a market surprise after the close Thursday by raising the discount rate from 1/2 percent to 3/4 percent. The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility. This is quite possibly the first major signal from the Fed that the easy money policies that they have held onto since the start of the financial crisis are coming to anend.
While recent testimonies from Fed Chairman Ben Bernanke last week and yesterday's FOMC minutes discussed such a move, many didn't expect it so soon. Market participates were also shocked about the timing of the move - a Thursday afternoon heading into an option expiration.
The increase in the discount rate widens the spread between the primary credit rate and the top of the FOMC's 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point.
The Fed made the move "in light of continued improvement in financial market conditions." The Fed said the changes are intended as a further normalization of the Federal Reserve's lending facilities, but do not signal any change in the outlook for the economy or for monetary policy.
In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.
The announcement from the Fed has sent the dollar higher, as represented by the 0.63% after-hours move in ETF PowerShares DB US Dollar Index Bullish (NYSE: UUP). Gold is down 1.16%, as represented by the move in ETF SPDR Gold Shares (NYSE: GLD). Financial stock are down about 1%, as represented by ETF Financial Select Sector SPDR (NYSE: XLF).
While recent testimonies from Fed Chairman Ben Bernanke last week and yesterday's FOMC minutes discussed such a move, many didn't expect it so soon. Market participates were also shocked about the timing of the move - a Thursday afternoon heading into an option expiration.
The increase in the discount rate widens the spread between the primary credit rate and the top of the FOMC's 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point.
The Fed made the move "in light of continued improvement in financial market conditions." The Fed said the changes are intended as a further normalization of the Federal Reserve's lending facilities, but do not signal any change in the outlook for the economy or for monetary policy.
In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.
The announcement from the Fed has sent the dollar higher, as represented by the 0.63% after-hours move in ETF PowerShares DB US Dollar Index Bullish (NYSE: UUP). Gold is down 1.16%, as represented by the move in ETF SPDR Gold Shares (NYSE: GLD). Financial stock are down about 1%, as represented by ETF Financial Select Sector SPDR (NYSE: XLF).
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