Tags: fed | discount | rate | hike

Fed Hikes Discount Rate to 0.75 Pct

Thursday, 18 Feb 2010 05:08 PM

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

The Fed said the discount rate would be increased to 0.75 percent from 0.50 percent, effective Friday. It left its benchmark interest rate unchanged near zero.

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities," the Fed said in a statement.

"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," it said.

U.S. stock futures and bond prices fell while the dollar rose following the Fed's announcement.

Fed Chairman Ben Bernanke said last week the central bank could soon raise the discount rate, but stressed that would not be akin to a tightening in monetary policy.

Amelia Bourdeau a currency strategist with UBS AG in Stamford, Connecticut, said even though Bernanke mentioned it last week it was surprising to see the Fed act so soon.

"The market is taking this as a tightening and that's why we are seeing the dollar strengthening from here," she said.

ECONOMIC OUTLOOK UNCHANGED
The central bank's view of the economy has brightened in recent months as job losses eased, consumer spending strengthened and businesses stepped up purchases of equipment and software.

But the Fed has cautioned that recovery will probably be sluggish, and it expects to keep its benchmark interest rate -- known as the federal funds rate -- near zero for "an extended period." It cut the federal funds rate to near zero and the discount rate to 0.5 percent in December 2008.

In its statement on Thursday, the Fed said the economy and policy outlook remained about the same as in late-January, when its policy committee reiterated that low-rate pledge.

Before the financial crisis erupted in 2007, the discount rate was typically a full percentage point above the federal funds rate that governs overnight lending between banks.

The Fed cut the discount rate by a half-percentage point to 5.75 percent on August 17, 2007, when concern about the housing slump flared and financial markets became volatile.

That halved the spread between the two rates.

On March 16, 2008, the Fed trimmed a quarter point off the discount rate, leaving it just 0.25 points above the federal funds rate.

Both of those cuts, like Thursday's hike, came outside of the Fed's regularly scheduled policy-setting meetings.

Other changes announced on Thursday included shortening the typical maximum maturity for primary credit loans to overnight, effective March 18, and raising the minimum bid rate for the Fed's Term Auction Facility, another program put in place to foster liquidity in financial markets, to 0.5 percent from 0.25 percent.

"The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds," the Fed said.

The Fed said it would assess over time whether it needed to further widen the spread between the discount rate and the federal funds rate "in view of experience with the 0.5 percentage point spread."

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The Federal Reserve said on Thursday it was raising the interest rate it charges banks for emergency loans, its first rate move since December 2008, but insisted borrowing costs for consumers or companies would not rise. The Fed said the discount rate would be increased to...
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