Fed Raises Discount Rate 25 BIPs
The Federal Reserve just announced they are increasing the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.
Full press release after the jump . . .
The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.
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 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, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.
In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.
Easing the terms of primary credit was one of the Federal Reserve’s first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC’s target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.
Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.
The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC’s 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. 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 Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.
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February 18th, 2010 at 4:38 pm
Idiots.
February 18th, 2010 at 4:40 pm
Exit strategy activated. Being the cynic I am, I am wondering if the bond market, including new record yield curve today and nearly failed auctions, forced the Fed’s hand. Or maybe Obama, thinking a depression is no longer possible, wants to stick it to the fat cat bankers.
Either way, we are about to see how the market does without full faith and backstop.
February 18th, 2010 at 4:42 pm
Relentless Liesman spin activated…Fed will still be favorable to equities.
February 18th, 2010 at 4:45 pm
Nice of them to announce a day ahead of expirations too. And with equity shorts non-existent…further insult to the fat cats by Obama?
February 18th, 2010 at 4:49 pm
“nearly failed auctions, forced the Fed’s hand”
How does that work? If there is no more free money don’t the banksters stop purchase of treasuries.
February 18th, 2010 at 4:51 pm
@steve barry
This barely registers on the seismograph, no? Spigots still running pretty fast.
Further, anyone out there have any idea how prevalent use of the discount window actually is?
February 18th, 2010 at 4:57 pm
all about 85 dollar oil, on the edge, and an oil tax kills all, pretty simple imho
February 18th, 2010 at 4:58 pm
@scharfy
Dollar rose a full cent vs every major currency in one minute. Thanks, Ben.
February 18th, 2010 at 5:02 pm
@flip
Yea i’m seeing that, we’ll see how the market digests this….
February 18th, 2010 at 5:05 pm
Oil is about to go thru the roof. Every single indicator is that commodities are fixing to pop. Spring is ahead, summer driving season, Iran destabilization, etc, etc, etc…Supply and demand no longer applies to planet Earth’s most important product.
Name one thing that is more critical to the future of civilization, besides the Will of God, than oil…..
February 18th, 2010 at 5:06 pm
Fed Raises Discount Rate 25 BIPs…
… in response to Matt Taibbi’s “Government gives Goldman free money” battlecry?
February 18th, 2010 at 5:14 pm
“Well Mr. Big Brother IRS man… take my pound of flesh and sleep well.”
http://www.thesmokinggun.com/archive/years/2010/0218102stack1.html
Boom.
February 18th, 2010 at 5:24 pm
In tomorrow’s news: credit card rates increase by 0.25% times 10.
February 18th, 2010 at 5:30 pm
“…further insult to the fat cats by Obama?”
how do you figure?
” …someone sold a metric ton of SPY right in front of the announcement – literally by seconds, 2 million shares were unloaded.”
ANOTHER blatant example of massive un-prosecuted insider trading in the Amerikan market…
February 18th, 2010 at 5:35 pm
Silence – the Great and Powerful OZ has spoken – pay no attention to anything behind the curtain (yield curve, nearly failed bond auction) – it’s just 0.25% – keep buying stocks…….(sarchasim intended)
February 18th, 2010 at 5:37 pm
It must be squid. It’s tentacles are spread everywhere.
February 18th, 2010 at 5:46 pm
Lamentations of a banker:
What, you mean I only get 3% instead of 3.25% on my fail-safe government-sanctioned carry trade (i.e., borrowing short to lend long, staying at the fed the whole way through)? How will I be able to earn my way out of insolvency now, Ben? You don’t really expect me to take that quarter percent out of my bonus pool, do you? Who do you think you are?
Ben’s response:
We’ve got to make it look less like we’re simply giving you guys money to cover your insolvency. Don’t worry, if things turn sour, we’ll give it back, and then some. In the meantime, you brought this on yourself with flouting those goddamn bonuses.
February 18th, 2010 at 6:15 pm
Perfect timing… right at at the top of counter wave Primary wave 2 (circle) high.
February 18th, 2010 at 6:19 pm
and to to complete Minor wave 2.
February 18th, 2010 at 6:42 pm
It’s official: The Fed raising rates 25 basis points means the recovery is now underway. Get hip: rising rates increase demand and liquidity while reducing our reliance on foreign creditors.
Get happy!
February 18th, 2010 at 7:12 pm
These comments are ill-thought out (and would lose me money) –
- oil is fine. if its $100/bbl thats fine… if its $50/bbl thats fine too. market adjustments are well underway (smaller cars, priuses, etc), multiple billion barrel deep-sea fields discovered, biofuel research, battery research. oil was $75/bbl in July 2006. Its FLAT on close to 3 years. And down roughly 50% on 2 years. in another 2 years… it is somewhat equally likely to be at $40/bbl (down 50%) as it is to be at $150/bbl (up 100%).
- electricity and technology is FAR more important than oil. Nat gas and coal and even ethanol are ALL simple oil substitutes. Education and research will solve all energy problems. of course, water and food are more important. kids are more important. interest rates are more important.
- who keeps saying “nearly failed” bond auction? are you nuts? why cuz the yield was 3bps (1-2-3 bps! above the market?) wasnt indirect bid-to-cover still 2x? the silly people writing that dont understand “direct bidders”, “indirect bidder” or the very basics of treasury auctions at all.
February 18th, 2010 at 7:33 pm
“Look Out Below” for options week Friday tomorrow morning IMO.
SPX is at crucial 1100, Fib. retracement levels, MA(50) and so forth.
Warning signs re commercial real estate paper coming due, municipal foreclosures, bank failures, etc. loom ugly.
Raise rates? Sure!
Lets move from mark-to-make-believe TO mark-top-market.
Don’t fight the tape! (which tomorrow could be really ugly IMO)
February 18th, 2010 at 7:48 pm
PeterR –
What “tape” am I not fighting? The one thats straight up 6% the last 10 days… or the one thats off 1% in after-market?
February 18th, 2010 at 7:55 pm
NYT: “The changes…had been signaled [by the FOMC] at its last meeting….”
FT: “…the move had been anticipated after comments from Fed board members and this week’s minutes….”
BUT
WSJ online headline: “Fed Decision Surprises Markets”
Either Rupert’s reporters are out of the loop or his rag heap cannot pass up an opportunity to sensationalize. Or both.
February 18th, 2010 at 7:57 pm
Larry Summers was on the tube earlier today commenting about the Chinese and Japanese selling $53 Billion worth of tresuries in December. He commented that when China holds a large share of our debt, we complain that the Chinese control us. When they sell we say they are bailing out of the dollar. Well what a surprise to see later in the day the 1/4 point rate hike by the fed. Does anyone think Summers appearance was simply a coincidence? I don’t. In fact that $53 billion unloading of our debt when the US doesn’t have two nickels to rub together is a signal from the Chinese that they want more in return for holding our debt. The Japanese actually hold a bit more of our debt then do the Chinese following last months selling.
February 18th, 2010 at 8:10 pm
So, now Barry….is the Fed leading the deferred rates higher, or is the longer dated debt market leading the Fed? How much power do we really think these guys have to control the 10 yr or 30 yr rates? A chart of the 10 or 30 yr rates for the last few days before this “surprise” and after this “surprise” might be instructive as to who follows whom….
February 18th, 2010 at 8:25 pm
Guess we’ve recovered, or at least enough.
You don’t need to wait until tomorrow to see the mayhem – just look at what the futures markets are doing. As of 8:11 pm ET, S&P 500 index contract -0.80% (back near the day’s lows), gold down to 1106 (-1.13%) and the US dollar index is getting a kick in the ass – 81.215 (+0.92%).
At least when these things happen on the planned FOMC release dates I can avoid major surprises. I wonder what makes this so urgent that it warrants this kind of unusual between-the-meetings action?
February 18th, 2010 at 8:28 pm
A .25 increase on the discount rate is just to appease the debt market. A move off of ZIRP is not happening before the second half of 2010 at the earliest.
February 18th, 2010 at 8:36 pm
Mr.E — “the mayhem”… is down 80 bps on SPX futures? Practicing for CNBC?
AndyT — The Fed can pin the short-end. But IF they pin the short-end at zero, and say “its not going anywhere”. They where do you buy 2yr rates? Where do you buy 3yr rates?
3Yr swap was at 2.50 bps in the summer (versus 30 bps LIBOR)… one could lever this up… and lock in say 3×2.50 = 7.50% versus floating carry away of 2×30 bps or -60 bps. Nice trade.
Then this “rolls down” into a 2YR trade. So right now 2YR swap is at 1.25 bps. So IF rates were stable to the 12 month point… one makes 750 bps in carry + 750 bps in roll or 15% (minus <1% funding cost) on a simple 3xlevered 3yr swap trade… in 1 yr.
The more confidently the Fed pins the short-end. The more attractive levered trades slightly out the curve become (2yr, 3yr, 5yr, etc)… so this pushes flatness out into the curve.
February 18th, 2010 at 8:42 pm
@ cognos
“Mr.E — ‘the mayhem’… is down 80 bps on SPX futures? Practicing for CNBC?”
There’s no need to be insulting !
February 18th, 2010 at 9:15 pm
This can’t be good for the yellow metal.
And why would those honest gold outfits trade their good, dependable gold for your hard-earned money?
And pay to advertise on TV so you can find out about them?
Time to go “Tea Party” on those gold outfits and the networks that run their ads.
…reminding you that those gold outfits (and the networks that got those ads) still have your money.
February 18th, 2010 at 11:02 pm
cognos:
“The Fed can pin the short-end. But IF they pin the short-end at zero, and say “its not going anywhere”. They where do you buy 2yr rates? Where do you buy 3yr rates?”
You make my point…the rates get set by the marketplace, which is MUCH, MUCH, MUCH bigger than the Federal Reserve….the Fed, as Alan Greenspan stated in testimony, FOLLOWS the market….
February 18th, 2010 at 11:16 pm
Peoples Republic Bank of China … calling the shots. Don’t fight ‘em. Maybe they buy some Greek debt here.
February 19th, 2010 at 7:24 am
[...] noted yesterday and earlier this morning, the surprise Fed discount rate hike has everyone guessing as to the [...]
February 19th, 2010 at 8:10 am
Andy T — You missed my point.
Sure, Fed only controls short-end. BUT… IF the short-end is just staying at zero, dont you want to lever into 2yr swap rates at 2%? Market players can use leverage. Receive 2%, pay 25 bps. IF the Fed will not move from zero… then the 2yr swap rate should be very very low. IF its 2%… a player who believes the Fed will stay at zero can make FREE MONEY. By levering into longer term rate swaps.
This pushes low rates out into the curve. It is especially effective in 1yr to 5yr space, but curve “roll down” is very powerful even out to 10yr. Do you see what I am saying with “curve roll down”?