The Federal Reserve Board voted to raise the discount rate by a quarter point to 0.75% today in an effort to begin unwinding the hugely expansionary policies undertook in the depths of the financial crisis. The move also widened the gap between the discount and federal funds rates, encouraging institutions to rely more on money markets instead of the Fed for short-term liquidity demands to try and stave off the looming spector of inflation.
The question remains, however, if the discount rate is even an effective tool for managing the money supply and inflation with financial institutions holding so many excess reserves, or if it is mainly a signal that the Fed is beginning to return to business as usual as the recovery appears to have gained a foothold. The rate hike will likely have little effect on the credit market with banks holding so much cash in reserve and the federal funds rate sitting below the discount lending rate, a sentiment echoed by stock markets which posted gains despite the move by the Fed.
2 comments:
I agree that the move may be more of an attempt at restoring consumer confidence rather than one made to impact financial institutions borrowing behavior. With reports claiming that we have begun our recovery from the crisis, I believe this is more of a publicity stunt by the Fed to increase consumer confidence.
In my opinion, i think this move is more of a signal that the unwinding has begun and it acts as a cautious and measured way to gauge its impact.
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