U.S. Fed Raises Discount Rate

The U.S. Federal Reserve has been considering raising the discount rate as part of the exit from economic stimulus. The idea was that such a move could help encourage bank lending to each other and also work to curb inflation by using money already in the supply. However, few thought that such a move would be attempted before the middle of 2010 at the earliest. Imagine the shock when the Fed announced last night, after U.S. markets closed, that it raised the discount rate.

But will it work? Spread bets and CFDs should be planned around whether or not the move could really signal a movement out of easy money. 

GFT's Kathy Lien addresses the issue of the Fed's discount rate hike in FX360:

The question going forward is whether the higher penalty to borrow at the discount window will be enough to encourage banks to lend to each other. Last week, primary credit borrowing at the discount window was only $15 billion compared to a high of $110 billion in October. Yet if banks were reluctant to borrow from each other and from the Fed before the discount rate hike, it is questionable whether the hike will change things. Of course the Fed also raised the discount rate because they want to stop adding money to the financial system. By increasing the penalty for borrowing from the Fed, they have in essence encouraged banks to borrow from each other, recycling money that should already be in the financial system.