Taking the Punch Bowl Away-Fed DISCOUNT Rate Increased

Yesterday while at a Dr’s appointment, at around 3:30 pm, my cell phone dinged letting me know there was “Breaking News.”   After reading that the Fed had raised the DISCOUNT rate, I immediately called the office to confirm the story, finding myself surprised, puzzled, and in a bit of  disbelief.      

Fed's Punch Bowl

Post Dr’s appointment, all good, and back at the office, I was able to confirm that the Fed had raised the DISCOUNT rate,  to .75, or in Wall Street lingo 75 basis points (A basis point equals one tenth of a percent). DISCOUNT in all caps, is to bring your attention to the fact that this rate is not the more common Fed Funds Rate, but rather the rate banks can borrow from the Fed for short term lending, often times a last resort measure for banks needing quick capital. (Please click on DISCOUNT for a link to the FOMC official definition.)     

Why my surprise?     

We had been told rates would eventually need to be raised, but assured Fed Funds Rates will stay low for “an extended period” of time.  Maybe the surprise was the delivery;  a Thursday, non-Fed Meeting, after the close of markets, or maybe it was just a subtle belief rates would stay low for a longer period of time.  The punch bowl is being pulled from the table, and now it is the beginning of a time for the US Economy to take hold on it’s own.  In our Q 1 2010 digital Newsletter  (Page 3) we stated the markets would be choppy as the hand off from stimulus, to holding our own began, we re-iterate this fact today.     

What are the immediate results?     

The first reaction will most likely be GASP!  The US Dollar may rally, gold, and commodities (oil) down, market indexes will probably fall from trigger happy traders (overseas markets are doing this currently as well as market futures this am) and the headlines will fly.     

A Good Thing! The Bigger Picture    

Beyond the surface of first reaction, raising of rates, even if only the DISCOUNT rate, is a good event, and represents the Fed’s confidence in our US Economic strength. While the Punch Bowl may be getting tugged away, this is a good event, in our opinion, and may eventually be seen in this light!  

Have a Good Day and Weekend!  


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