Dedicated to Deposits: Deals, Data, and Discussion

Fed Raises Discount Rate - Impact to Deposit Rates?

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The Fed raised the discount rate from 0.50% to 0.75% today. It's important to note that this is the discount rate and not the federal funds rate. Here are excerpts from the Fed's press release

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.
[....]
The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent.

Note, the Fed funds rate is still stuck at the 0% to 0.25% range, and that's the key rate that has the most influence on bank rates. As I mentioned today, the Fed continues to say to expect the Fed funds rate to be exceptionally low for an extended period.

Elizabeth Dukes, a voting member of the FOMC, gave a speech today that has a good explanation of the discount rate and how it's different than the federal funds rate. Here's a relevant excerpt from her speech

As I mentioned earlier, the discount rate is the rate we charge banks that borrow at our discount window. It is not the rate we target for monetary policy purposes. I'd emphasize that the changes are simply a reversal of the spread reduction we made to combat stigma and like the closure of a number of extraordinary credit programs earlier this month, represent further normalization of the Federal Reserve's lending facilities; they do not signal any change in the outlook for monetary policy and are not expected to lead to tighter financial conditions for households and businesses.

I had actually reported on rumors that the Fed would soon be hiking the discount rate in this Tuesday Notice. Today's hike was a small surprise in that the rate hike happened this soon. Fox Business reported that analysts had expected the rate hike next month. The markets appear to be surprised by this move, and thus we're seeing a strengthening dollar and higher Treasury yields. This may be a sign that interest rates will rise sooner than what had recently been expected.

There was also news today of higher than expected producer price index, but according to this MarketWatch article, the PPI is much less important than the consumer price index as a measure of inflation.

Update 2/19/10: The CPI was just released this morning, and the news is not good for those hoping for higher interest rates. According to MarketWatch

U.S. core consumer prices fell a seasonally adjusted 0.1% in January, the first decline since 1982, the Labor Department estimated Friday. [...] Inflation was weaker than expected by economists surveyed by MarketWatch.

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3 comments.
Comment #1 by Anonymous posted on
Anonymous
The discount rate raised is not the feds fund rate but it is the "emergency window" rate which used to be 100 bp above the rate above the fund rate and was lowered to 50 bp during the crisis. We are still far from a real fund rate increase and expecting any favorable change in CD rates is too early. This being said 16.8% annual wholesale inflation is too high. It is my belief that the feds are aiming at a 5-7% inflation rate as an exity strategy which will support housing price and cause the necessary reduction in standard of living to accomodate the new reality.

Politically anything above 6 or 7% inflation will be too heavy to sustain. But if there is no inflation then the housing sector will crash again within 1 year and the unemplyment rate will head north again.


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Comment #2 by Anonymous posted on
Anonymous
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Err ... what I suspect this means is that FED is 'encouraging' the banks which borrow from FED to find the money 'elsewhere' if they find favorable terms.  In effect this shift could lead to the banks seeking the loan from themselves rather than going to the FED.

So ... perhaps it follows that such banks that have the funds to lend might benefit from such lending.  ... And where do they get such funds to lend? ... A small fraction of it could come from the depositors!  ( Yes!  ... as some would like to say 'we-the-savers'. )  Which might mean that the banks may start offering a teeny tiny 'better' deal to their depositors!

 

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Comment #3 by Anonymous posted on
Anonymous
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Err ... forgot to mention that the government bonds have taken a large hit.  Which means that the Yields have risen. Generally there is a positive corelation between the government bond yields and the deposit rates and also the mortage rates.

Long to medium duration bonds have fallen.  The exchange-traded-funds TLT, TLH and IEF have all fallen in recent days, pushing up the yields.

Maybe ... just maybe ... this could be the beginning of the what the bloggers here (you-the-savers) are waitating for ... higher yields for your savings and CDs.

 

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