Friday, February 19, 2010

Fed Rate Hike? Not Yet

You can read the Fed statement here. In meaningful terms, the 50bp increase in the discount rate, and change in tenure from a max of 30 days to overnight, doesn’t amount to much although Asian markets are running a little scared right now. The discount rate only affects banks wanting to borrow direct from the Federal Reserve System, and doesn’t impact market interest rates at all. Like central banks the world over, the Fed is preparing the ground for “normalisation” of the domestic monetary environment. Since nobody needs to borrow (even the Term Auction Facility is being closed next month), the move is more a case of signalling FOMC intentions as the US economy recovers, rather than a substantive move towards tightening monetary policy.

If you want to read a fascinating and highly informative discussion on the Fed’s exit strategy, particularly the use of interest on bank reserves, you can do worse than to read these two blog posts: here and here.

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