Thursday, February 18, 2010

Fed Raises Discount Rate in Move Against Banks; Dollar Soars

The Fed Reserve will raise the discount rate, effective today, to 0.75 percent from 0.50 percent, it said after the trading close.

Graham Bowley and Eric Dash of The New Times write that it's a signal to "banks that the nation’s banks had healed enough to withdraw some of the extraordinary support that Washington put in place during the financial crisis." Those low rates helped accelerate the banks' recovery.

Even though the Fed had telegraphed its intention to raise the largely symbolic discount rate, the timing of the move, coming between scheduled policy meetings, caught some economists by surprise. Stocks and bonds sank in after-hours trading, suggesting Friday could be an anxious day for the markets.

“This is a victory lap by the Fed,” Zach Pandl, economist at Nomura Securities, said. “It is a signal that the Fed is very confident in the health of the banking system. Fundamentally, these actions are a sign of policy success.”

The move gave the U.S. Dollar some strength against foreign currencies. The dollar rose 0.2 percent to $1.3578 per euro at 4:30 p.m. in New York, from $1.3607 yesterday, Bloomberg News reported. The yen was at 91.48 versus the dollar from 91.25.

Dave Shellock in London and Nicole Bullock in New York, writing for the Financial Times, see a rough ride in next day's trading:

The Fed's move potentially sets up a volatile trading session for today across global markets. This comes after mixed signals yesterday about the US economic outlook and lingering concerns over sovereign debt.

The Fed will raise the discount rate, effective today, to 0.75 per cent from 0.50 per cent. The Fed said the move does not signal a change in policy outlook.

"This is just a small step in the well advertised 'exit strategy' as the Fed tries to normalise and remove its previous emergency measures," said Jim Caron, head of global rate research at Morgan Stanley.

Yesterday, global equities cautiously progressed and the dollar vacillated amid some uncertainty about when the Federal Reserve might start removing stimulus measures given the hesitant nature of the US economic recovery.

The dollar hit a nine-month high against the euro on the currency markets in early trade, although it retreated as US economic figures painted a mixed picture. After the Fed news, the dollar rose against both the euro and the yen.

Oil futures sank, Claire Rangel of Dow Jones Newswires reported at 5:12 p.m. Eastern Thursday:

In electronic trading, light, sweet crude for March delivery was trading at $78.38 a barrel, after settling up $1.73, or 2.2%, higher at $79.06 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled $1.51, or 2%, higher at $77.78 a barrel.

Bloomberg reported at 9:44 p.m. Eastern Thursday that GOLD 100 OZ FUTR (USD/t oz.) was down 12.60 to $1,106.10, representing a 1.13 percent drop.

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