Friday, February 19, 2010

Fed Update 02.19.10

Fed Update – discount rate spooking markets (US$ strong, eqties/TSYs weak), but was expected
and doesn’t signal a shift in monetary policy. From JPMorgan’s B Kasman: “This move does not
alter our view that the Fed's first policy rate hike will come in 1H11”; Fed officials made
comments Thurs night in wake of the discount rate action and downplay the potential for nearterm
action on Fed Funds rate. The fact the discount rate hike didn’t come during an FOMC
monetary policy decision meeting emphasizes the fact that this wasn’t a monetary move.
· Fed after the close Thurs night announced it would be raising its discount rate from
0.5% to 0.75%. In addition, the Board announced that, effective on March 18, the typical
maximum maturity for primary credit loans will be shortened to overnight.
· The move by the Fed to raise the discount rate was telegraphed in Bernanke’s recent
“exit policy” speech

( and in the
latest FOMC minutes
· Thurs night's moves "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"
· 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 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. 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.
· Fed Events to watch coming up – 1) the Fed’s semi-annual Humphrey Hawkins testimony
(Reuters says that Bernanke may speak Feb 24-25 before the House/Senate, respectively); 2)
Fed releases its next Beige Book on Mar 3.


No comments:

Post a Comment