Thursday, February 18, 2010
Fed raises emergency funding rate
While this rate really has little importance, it does have an affect on expected rates, which we know from the fisher equation affects the nominal interest rate. The Feds motivation behind raising this rate is to raise confidence in the economy so that eventually rates can rise to a desirable level to head off a tidal wave of inflation.
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I think that the increasein the interest rate charged by Fed is a signol of the improving economy in US. I might be wrong but I'm assunming that as the economy will start to recover, people will borrow more money for purchases and demand for loanable funds will go up. Therefore banl will borrow more often from fed and discount rate will increase in the future even more
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ReplyDeleteI have different opinion, changing discounted rate is supposed to lower the money supply. I expect that Fed is afraid of bank keeping so much money without lending. So raising discounted rate and keeping it below federal fund rate to encourage bank borrow from each other and supporting for the money cycle or velocity.
ReplyDeleteThis movement also help hinder inflation somehow.
~T.R.
I just want to add a few ideas to what Adam has mentioned. Although raising the discount rate does not significantly influence the market for loanable funds and the Fed has explicitly stated that the modification does not signal any change in the outlook of the economy, such action may lead people into thinking that there will be inflationary pressure in the future. On one hand this expectation boost the current consumption and money demand, on the other the higher discount rate serves as a precursor for any future increase in the federal fund rate to combat inflation.
ReplyDeleteI agree with Ramiz, I think this is the sign of the economy improving if the Fed it increasing interest rates. People will now have the confidence to borrow money from the banks to make purchases, which will put the banks back to where they were with borrowing from the FED.
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