Discount Rate Raised to 0.75%

The Fed surprisingly raised the discount rate by 25 basis points after the close on Thursday. Minutes from the meeting earlier this week showed the Fed favoring raising the discount rate as the first step toward monetary policy efforts. The discount rate is the rate charged to banks for emergency lending. The markets showed a mixed reaction as they opened lower in the morning but were able to end even on the day.

Raising the discount rate does not mean the Fed is going to start tightening the funds rate. Raising the discount rate is a good sign. It just means that financial conditions have improved to an extent that banks don't necessarily need emergency loans as frequently. The financial crisis was the first situation to cause a global meltdown and should be the first addressed to continue improvement toward getting out of it.

The Fed has continuously said that it will keep the fed funds rate lower for an extended period. With inflation under control and unemployment still high, we can expect this to be held true for another several months. There is no need to raise rates too soon, or we could be pushed back into a recession. Raising the discount rate is a first step toward implementing the recovery plan and will in no way hurt consumers.

As expected with a rise in rates, bonds prices fell. Equities were mixed as the surprise didn't take too kindly at first. We do have to remember that raising rates will admit an economic recovery is in the works. The dollar rose as expected. Maybe instead of making more cash money, we should just cash in on our cash money. Volatile times are ahead as the Fed is going to have to take this one month at a time as economic data rolls in. Since the dollar is going up, now would be a good time to take a vacation to the other side of the ocean before Europe gets its act back together.