{"id":339839,"date":"2010-02-19T08:16:00","date_gmt":"2010-02-19T13:16:00","guid":{"rendered":"e2249889-c78b-43e3-9643-b1d7d4aa587b:397979"},"modified":"2010-02-19T08:16:00","modified_gmt":"2010-02-19T13:16:00","slug":"feds-move-on-discount-rate-a-logical-step","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/339839","title":{"rendered":"Fed’s move on discount rate ‘a logical step’"},"content":{"rendered":"

The Federal Reserve Board\u2019s decision to increase the discount rate<\/a> \u2013 what it charges banks for emergency loans \u2013 from 0.50% to 0.75%, should not be interpreted as a change in its monetary policy. If it was, this would impact the borrowing costs for households and businesses. <\/p>\n

The Fed wants the market to know that this is not a tightening move of any kind. Instead, the it should be seen as a logical step along the path of further
\nnormalization of the Fed\u2019s lending facilities. It is part of the first phase of withdrawing liquidity and winding down emergency programs, and follows the closure of a number of credit facilities.<\/p>\n

\u201cThis step should not be viewed as a measure of monetary tightening,\u201d according to UBS Wealth Management.<\/p>\n

It noted that prior to the financial crisis, the Fed maintained a 1% spread between the target Federal Funds rate and the discount rate and only offered overnight loans. The latest move brings the spread back up to 0.5%.<\/p>\n

UBS also pointed out that discount window borrowing has been a trickle compared to other liquidity provisions by the Fed. <\/p>\n

Despite the fact that this change is cosmetic only, the psychological impact of the rate increase is real and is material nonetheless, according to Dennis Gartman. In Friday\u2019s edition of The Gartman Letter, he used the nautical metaphor of a \u201cwarning shot across the bow\u201d of the capital market.<\/p>\n

\u201cRather than waiting to change the rhetoric in the language of the next communiqu\u00e9 following the next FOMC meeting, the Fed has issued its warning shot in the form of this discount rate change,\u201d Mr. Gartman wrote. \u201cCosmetic changes can be formidable in people and in economics, and this one such formidable costmetic change.\u201d <\/p>\n

National Bank Financial chief economist and strategist St\u00e9fane Marion noted that despite the action, the gap between the Fed Funds target rate and the discount remains below its pre-crisis level of 100 basis points. Mr. Marion continues to expect a change in the Fed\u2019s monetary policy stance will begin in August 2010.<\/p>\n

The economist noted that Ben Bernanke\u2019s prepared remarks, back when he was snowed in on Feb. 1, showed that an increase in the discount rate was coming.
<\/p>\n

\u201cWe have reduced the maximum maturity of discount window loans to 28 days… Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve\u2019s lending facilities, in light of the improving conditions in financial markets; they are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signalling any change in the outlook for monetary policy, which remains about as it was at the time of the January meeting of the FOMC.\u201d<\/span> <\/p>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

The Federal Reserve Board\u2019s decision to increase the discount rate \u2013 what it charges banks for emergency loans \u2013 from 0.50% to 0.75%, should not be interpreted as a change in its monetary policy. If it was, this would impact the borrowing costs for households and businesses. The Fed wants the market to know that […]<\/p>\n","protected":false},"author":4059,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-339839","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/339839","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/4059"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=339839"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/339839\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=339839"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=339839"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=339839"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}