Thursday, February 18, 2010

Now It's Federal Reserve's Fiat: Discount Rate Raised to 0.75%

supposed to curb carry-trades by member banks

Fed hikes discount rate to 0.75% (2/18/2010 Marketwatch)

WASHINGTON (MarketWatch) -- The Federal Reserve announced late Thursday that it was raising its discount rate in order to encourage banks to borrow from the private market for short-term credit instead of from the Fed.

"In a statement, the Fed said it would raise its discount, or primary credit rate, to 0.75% from 0.5% effective on Friday.

"Fed Chairman Ben Bernanke signaled last week that the Fed was mulling the move.

"Fed watchers had expected the move to come at the next Fed meeting in March. Today's action shows a sense of urgency on the part of the Fed officials.

"The Fed said the move is intended to "normalize" its operations as the financial crisis winds down.

"The change is not a tightening and does not signal any change in monetary policy, the Fed said.

"The change in the discount rate was approved by the Fed Board of Governors on requests from all 12 district bank boards.

"Former Fed Gov. Laurence Meyer drew attention to the possibility of a discount rate hike early this year. Meyer said Fed officials were unhappy that banks were engaging in a carry-trade or borrowing from the Fed at ultra-low levels and then reinvesting the money elsewhere."

My question is: WHY NOW?

My second question is: WHAT'S THE POINT?

After hours, stocks and index futures are reversing today's gains. Notable exception is US dollar. Thank you, Ben, for further complicating the Op-Ex week.


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