After Initial Knee-Jerk, Wall Street Gets Comfortable With Discount Rate Hike

Wall Street is weighing in on the Federal Reserve move after the close Thursday to raise the discount rate, or "emergency rate," from 1/2 percent to 3/4 percent. In addition, the maturity of discount window borrowing was reduced from its current 28-day maturity to overnight.

Overall, the Street is saying that this news was not a big surprise as it was well-telegraphed by Chairman Ben Bernanke in a copy of his prepared testimony to Congress last week. Many said the move by the Fed is a sign that things are normalizing but does not suggest that hikes to the more important federal funds rate are imminent.

Stocks, after starting lower, have moved into the green in mid-day action Friday.

Here are some thoughts from a host of Wall Street players:

• FBR Capital: Discount Rate IS NOT the Fed Funds Rate; Broad Monetary Policy Unchanged - "Implications of the hike are minimal, in our view. These actions are a winding down of crisis measures, not a change in broad monetary policy. Coming through 2009 into 2010, credit market functionality has greatly improved. The TED spread (three-month LIBOR less three-month T-bill yields), by example, has fallen to just under 15 bps from a peak of 464 bps in the crisis. At the same time, the balance of primary credit (discount window borrowing) at the Fed is now down to about $14 billion from its peak of just under $112 billion. Simply put, there is no reason to offer access to the "emergency" window at more accommodative terms given the improved conditions of the private markets and the scaled down use of the facility."
  
• Bill Gross: On CNBC, PIMCO's Bill Gross said the discount rate increase suggests the fed will be on hold for at least the next 6 months. He said the move was likely to "appease the hawks."
  
• Meredith Whitney: Whitney believes that the Fed's move could "give some banks pricing power", but may also spark asset declines. See also feels that companies will have less need to borrow than in the past and that bank's lending appetites have been reduced "dramatically". Whitney expects comps to be very difficult for big banks this year as the government "punchbowl" is now gone for banks.
  
• Goldman Sachs: "On the back of the Fed's increase in the discount rate we make no change in our core view that rates stay lower for longer – this is an unwinding of emergency liquidity measures which are no longer needed as opposed to the Fed seeking to raise rates and tighten financial conditions." Due to the raise, the firm raised their rating on Discount Brokers to Neutral and Schwab (Nasdaq: SCHW) to Neutral
  
• Art Cashin: "The buzz about the rate hike drew questions from some none Wall Street types on the periphery. A quick lesson in central bank money mechanics ensued. It was explained that the Discount Rate only related to the Discount Window. It was further explained that the Discount Window was where banks came when they couldn’t borrow from other banks. The Discount Rate was traditionally higher than the Fed Funds rate and borrowing at the window usually carried a stigma since it indicated that other banks saw you as a weakened credit. During the banking crisis, the Fed took pains to eliminate both the stigma and the premium. So, to some degree, the hike in the Discount Rate was a signal that the crisis phase is over and banking was returning to "normal".
  
• J.P. Morgan Chase Bruce Kasman: "This move does not alter our view that the Fed's first policy rate hike will come in [the first half of 2011]."
  
• Ticonderoga Securities' John Stoltzfus: It was well telegraphed by Mr. Bernanke and Company and further implied by the hotter than expected PPI yesterday morning. The normalization is on. We can't help but recall when the Fed started to raise the benchmark rate at the end of June 2004. As we remember, it took umpteen hikes before the systemic walls showed significant cracks in June of 2007 that led to the troubles unforgotten. With the markets and industry somewhat deleveraged from the prior cycle, the market may be able to digest this first "shot across the bow" very well for now after paying a short "homage to rising rates". Markets have been very well behaved of late as we have noted over the last few weeks in spite of china credit tightening, Mediterranean peripheral deficits and prospects of multiple reforms waiting in the wings stateside. This is yet another test of the recovery process as it develops. We could come into some near tern turbulence -----but we've had the keep seat belt fastened when seated light on the console on for some time now. We remain constructive on the economic recovery and continue comfortable with the adage, "hedge the cyclical and fund the secular" for now."

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