Friday, February 19, 2010

Economists [and Brokers] React: Fed Raises the Discount Rate

A twofer from the Wall Street Journal's Real Time Economics blog:
Fed’s Duke: Discount-Rate Hike Not Signaling Any Monetary Policy Change

A newly announced increase in the rate the Federal Reserve charges on emergency loans to banks does not signal any change in monetary policy but shows the central bank is moving to reverse the exceptional aid it provided amid the global financial crisis, Federal Reserve Board Governor Elizabeth Duke said Thursday.

In remarks prepared for delivery to the Economics Club of Hampton Roads in Norfolk, Va., Duke said the 0.25 percentage point increase in the discount rate isn’t expected to lead to tighter financial conditions for U.S. consumers or businesses....MORE

Economists React: Fed Raises the Discount Rate

  • To normalize capital markets, the Fed has to eliminate the distortions quantitative ease create and, to this end, raising the discount rate is the first of many necessary steps. The last step will be directly raising short-term markets rates, be it the Fed funds rate or the IOER [interest rate on excess reserves]. We still don’t know what will guide the Fed to do how much and when, and that is a problem. Today’s move was designed to take free arbitrage off the table rather than be any statement about the state of the economy other than that the financial system is stable enough to begin standing on its own. A stable financial system is necessary for the economy to grow but not sufficient. The minutes of the January FOMC meeting were a sober assessment of the economy giving little sense that prospects are for anything more than stable growth around 2% to 3% despite record monetary and fiscal stimulus. Given this outlook, a pace of unwind as accelerated as some FOMC members seem to want is very much unlikely. – Steve Blitz, Majestic Research
  • While the increase in the discount rate came a bit earlier than we thought, it was clearly heralded by Chairman Bernanke in his testimony on February 10. … This step, in combination with the closure of most short-term liquidity programs earlier this month “is intended as a further normalization of the Fed’s lending facilities” in light of continued improvement in financial market conditions. We too would like to emphasize that the discount rate is a tool for addressing financial system stress, while the fed funds rate is a tool for addressing macroeconomic stability. … Just like easing the terms for discount window lending programs was the first response of the Fed to the crisis (in August 2007), its removal is now the first part of the exit strategy. – Harm Bandholz, UniCredit Research


Meanwhile MarketBeat, the Journal's flagship blog seems to have absorbed some of the headline style of another of Rupert's properties, the New York Post:

Fed Discount Rate Hike Reax: ‘The Normalization is On’

By now everyone and their mother is aware that the Fed raised the discount rate to 75 basis points from half a point as part of its step away from its emergency-lending efforts. Here’s what some close observers of the markets are saying about the move, via emails into MarketBeat.

Howard Ward, GAMCO Growth Fund: “Any knee jerk reaction to sell this news is a mistake. This is a sign of improving conditions. No high fives or fist bumps until we see job creation, but the Fed, like the market in recent days, is sensing that the economic recovery is gaining traction. If you are worried about systemic risk, the Fed is saying you should worry less.”

Paul Hickey, Bespoke Investment Group: “This is likely to cause added volatility tomorrow morning. Buckle your seatbelt at the open.”

John Stoltzfus, Ticonderoga Securities: “Telegraphed indeed by Mr. Bernanke and Co. and further implied by the hotter than expected [Producer Prices Index data] earlier today. The normalization is on.”>>>MORE

Meanwhile this playa goes old-school with "Three steps and a stumble". Be careful Shorty.*

[please don't do that anymore -ed]

*From the Urban Dictionary:

"Originally used to mean a young man, new to the game. By new to the game, I don't mean he just meant a rapper, but he just started selling crack, just started rapping, whatever, but even simpler it was a term used to mean just a person much younger than you.

Now, commercial rappers have turned the meaning upside down to mean a 'fine female', apparently."
"shorty's laugh was cold blooded as he spoke so foul,
Only twelve trying to tell me that he liked my style"
-NaS, 1994

"Shorty is shaking her ass on my Hummer with spinning rims, or something."
-average commercialized rapper today
Those are a couple out of dozens [don't you dare start playing the dozens -ed] of examples at the Urban Dictionary.

I use the word for short sellers.