And finally – the Fed increases a rate. Of course, it’s the discount rate not the federal funds rate, and Ben Bernanke, Federal Reserve chairman, and others have been quite clear that raising the discount rate is not tightening monetary policy.
“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 release said, echoeing written comments from Fed chairman Ben Bernanke last week. “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).”
Rather, they say, raising the discount rate – the rate at which depository institutions borrow reserves from the Fed – to a more normal level above the federal funds rate (they raised it from 50bp to 75bp, normally it’s about 100bp above the federal funds rate) is putting the conditions in place that monetary policy could eventually be tightened.
But it doesn’t indicate anything about the timing of eventual tightening. In theory, the Fed could create the conditions which would allow it to tighten monetary policy (either by raising rates or selling off large parts of its balance sheet) and wait years before it actually does.
Nonetheless, the move is undoubtedly an upbeat sign from the Fed, which said the move came “in light of continued improvements in financial market conditions.”
In addition to raising the discount rate, effective on Friday, the Fed announced that the final TAF auction would be held in March, and that the minimum bid would rise by 25bp to 50bp. It’s also shortening the typical maximum maturity for primary credit loans.
All steps indicating that the Fed is returning to more standard monetary policy.
