Fed Raises Discount Rate

One of the tactics the Fed has been using to combat the bad economy is to keep interest rates at artificially low rates. Yesterday they announced that they were increasing one rate from 0.5% to 0.75%... a 50% increase.
http://www.cnbc.com/id/35465481

The Federal Reserve said on Thursday it raised the interest rate it charges banks for emergency loans but insisted that its first rate move since December 2008 would not raise borrowing costs for consumers or companies.

The Fed cast its decision to raise the discount rate to 0.75 percent from 0.5 percent as a response to improved financial market conditions that warrant less of a helping hand from the U.S. central bank.

It went to pains to draw the distinction between the discount rate and its target for overnight interbank rates, its main monetary policy tool, which remains unchanged near zero percent as a fragile U.S. economic recovery struggles to gain traction.

Yes, they went to great lengths to assure us of how little this will affect our lives. However, some analysts were shocked and expect a sell-off in the stock market as it opens today.

Market watchers were shocked by the announcement, which came after markets closed Thursday.

“I'm shocked. Completely shocked,” Todd Schoenberger, managing director of LandColt Trading said of the Fed’s move to raise the discount rate. “It makes me wonder if the CPI number coming out tomorrow is going to be just absolutely horrible—maybe they got wind of something,” he said.

Schoenberger expects the Fed to raise the federal-funds rate, the rate banks charge each other, at its next meeting March 17-18. He, like many traders, didn't expect the Fed to make a move until the second half of this year.

The analyst expects stocks to pull back from the Dow Jones Industrial Average's recent three-day winning streak as a result of the Fed move.

"Expect a dramatic selloff at the open tomorrow morning," Schoenberger told CNBC.

You can read the Fed's statement here:
http://blogs.wsj.com/dispatch/2010/02/18/federal-reserve-statement/

Though this move doesn't mean they're ready to raise the rates on all of us, it does mean they're testing the waters for such a move.

The increase in the discount rate “does not mean that the Fed is ready to hike [the fed-funds rate] or has a set time for such a move. But it does mean that the Fed is preparing the way,” said Robert Brusca, chief economist at FAO Economics. “This is very much a move to prepare markets and to test markets to see if they are ready to absorb a rate increase by putting the Fed’s lending vehicles back in a normal configuration,” he said.

The Feds cannot keep interest rates low forever, and with all the money they printed over the last year, currency inflation could hit with a vengeance... possibly sometime next year.

And though the Fed was hoping the effect would be muted, it wasn't.
http://online.wsj.com/article/SB10001424052748703315004575073810416822660.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

The Federal Reserve raised an interest rate it charges banks for emergency loans, and emphasized that a broader tightening of credit for consumers and businesses is still at least several months away. But the late-afternoon increase in the discount rate didn't have the muted impact Fed officials hoped for.

Stock futures and bond prices fell, and the dollar rose against the euro.

"The Fed can talk all day about how the discount rate hike is technical and not a policy move, but the market sees it as a shot across the bow," Christopher Rupkey, an economist at Bank of Tokyo-Mitsubishi, said in a note to clients.

So keep your eye on this over the next few months.