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Monday, February 22, 2010

"The Fed's Discount Rate Hike"

The Fed's recent decision to increase the discount rate does not signal an intent to tighten policy:

The Fed's discount rate hike, econbrowser: The Federal Reserve Board announced on Thursday that it is raising the interest rate at which banks borrow from the Fed's discount window to 0.75%, a 25-basis-point increase, and intends to return discount lending primarily to the traditional overnight loans. "The rate hike cycle begins," declared 24/7 Wall St...
But I don't believe that's what the discount rate hike means at all. The Fed sometimes has used discount rate changes as a signal of its intentions for interest rates more broadly. But the Fed press release accompanying the move stated flatly that's not the case this time...
The same message was emphatically repeated in statements by Fed Governor Elizabeth Duke and Federal Reserve Bank of New York President William Dudley. Maybe you have a theory that the way the Fed communicates that it intends to raise rates is by denying that it intends to raise rates. If so, I can't help you. ...

The Wall Street Editorial page was upset because the move didn't signal an intent to begin raising interest rates sooner rather than later. The editorial page gang would also like to balance the budget beginning right now with spending cuts "to demonstrate that those who can be trusted with small things—cutting back what can be removed now—can be trusted with larger things." It's all part of their quest to repeat the 1937-38 experience.

    Posted by on Monday, February 22, 2010 at 12:32 AM in Economics, Monetary Policy | Permalink  Comments (12)


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