Sure, the Federal Reserve made it very clear on Wednesday that while it would soon be raising its discount rate, this should NOT be taken as an indication that policy was being tightened.
But we’re pretty sure that’s exactly how it will be taken, what with markets being markets…
The discount rate, of course, is the rate charged to banks visiting the discount window seeking emergency funding. Traditionally it stands about 100bps north of the widely followed Fed Funds rate, but was chopped to 0.5 per cent during the crisis as part of the bail-out.
The penalty usually associated with banks using this Fed facility is now being gradually restored. Thursday’s move increased the rate to 0.75 per cent.
January’s Fed minutes, released on Wednesday, stated:
Participants generally agreed that such steps to return the Federal Reserve’s liquidity provision to a normal footing would be technical adjustments to reflect the notable diminution of the market strains that had made the creation of new liquidity facilities and expansion of existing facilities necessary and emphasized that such steps would not indicate a change in the Committee’s assessment of the appropriate stance of monetary policy or the proper time to begin moving to a less accommodative policy stance.
Note that Treasury yields at the longer end were on the march earlier on Thursday – seemingly a reaction to (well anticipated) news that some $126bn of US government debt will be auctioned next week.
Did the discount news leak?
Here’s the yield, from Reuters, on 10 year treasuries:
With a slew of other indicators – such as stronger then expected producer prices – encouraging the idea that economic recovery is on track, there will be every reason to talk up the idea of the Fed exit policy actually starting.
Markets might be fun on Friday. Witness the yield on 2 year treasuries late on Thursday, just after the discount news:
Stocks, meanwhile, tanked in after hours trading.
Related links:
Fed raises discount rate – FT
Fed raises discount rate – Money Supply
Fed Raises Interest Rate That It Charges Banks - NYT