US Federal Reserve raises discount rate

[Hannah Bell]

In a move that took the financial markets by surprise, the US Federal Reserve Board on Thursday announced that, effective Friday, it was raising its discount rate by a quarter point, from 0.50 percent to 0.75 percent...

The discount rate is the interest the Fed charges for emergency loans to commercial banks. The federal funds rate is the interest charged for overnight loans between banks. The latter plays a far greater role in setting interest rates throughout the economy, affecting inter-bank loan rates, borrowing rates for businesses, mortgage rates and interest on consumer and small business loans.

But while the hike in the discount rate will not directly impact loan rates more generally, it is an unmistakable signal that the Federal Reserve is unwinding the extraordinary measures it took to pump cheap credit into the economy and bolster the housing market and consumer spending, and suggests that the central bank may begin to raise the federal funds rates sooner than had been anticipated.

Whatever the near-term consequences of the discount rate hike, the action signals a turn by the Fed to disengaging from its previous policy of flooding the banks and financial markets with cash to tightening credit in order to rein in exploding federal deficits and a rapid growth in the US public debt. It parallels the moves by the Obama administration to impose austerity measures on the working class in order to pay for the multi-trillion-dollar bailout of the banks.

Significantly, the Fed’s announcement came on the same day as Obama’s appointment of a bipartisan panel to recommend severe cuts in spending and benefits under the nation’s core social programs—Medicare, Medicaid and Social Security...

It also coincided with a report on producer prices showing a sharp rise of 1.4 percent in January. According to the Wall Street Journal, US wholesale prices are up 4.6 percent over a year ago and rising at an annual rate of 9.8 percent in the past six months.

In its Thursday statement, the Fed announced a number of additional measures to unwind programs that had been put in place to boost the financial markets...

When after-market trading on Thursday indicated a possible run on bank stocks when markets opened Friday, a number of top Fed officials issued statements portraying the rise in the discount rate as a technical measure that did not reflect a change in the Fed’s cheap credit policy. Largely as a result of this intervention, stocks in Europe and the US closed slightly higher on Friday...

http://www.wsws.org/articles/2010/feb2010/fed1-f20.shtml

[lib2DaBone]

1. I would guess they are going to have to raise rates..China is dumping our bonds...

Who is going to finance the Republican-Wet-Dream Wars all over the globe?

[ProfessorGAC]

2. Some Surprisingly Stupid Items Included In That Article

The increase in the PPI was caused by so many firms holding the line on prices for nearly 2 years. As energy prices and raw materials increased, those companies so significant margin erosion. As Consumer Confidence rose a bit, and pent up demand increased overall volume of goods and service, companies began to raise wholesale prices to regain at least some of that margin.

So, the rate of increase in PPI over the last 6 months is not indicative of any grander macroeconomic condition.

Also, tightening of cash by raising the ODR does NOT stop the expansion of deficits. If anyone needs proof, look at what the Fed did in the middle Reagan years. Rates rose in 85 and 86 and the deficit just got larger and larger. The same thing happened during the Nixon years, the Carter years, and the 43 era. So, this analysis seems to be unaware of the facts.

And, if the Fed loosened money earlier to boost the housing market and extend cheap credit, then they should all be fired, because there is no evidence that it worked in any way shape or form.
GAC

[ThomWV]

3. This is the first post I've ever seen you make that makes no sense at all

And generally I read every word you write with great interest because I consider you to be a person who gives good reason to their statements. However you really threw me for a loop with "no indications of any grander macroeconomic condition."

On Edit: I don't mean that in any mean way, I just think you may have left something off that brings it all together - your insights are always welcome.

[ThomWV]

4. Please accept my apology, I misread your post

I did not realize you were paraphrasing some of the statements from the article, I thought they were your own (which you have to admit would be mighty confusing). Please accept my apology.

[ProfessorGAC]

5. No Problem Thom

I reread my post and i should have directly quoted the article, instead of paraphrasing. I caused the confusion.
GAC