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No Surprise, Fed Raises Discount Rate

February 18th, 2010 Michael McDonough

Chairman Bernanke recently indicated that the Fed was considering an increase in the discount rate, which tends to mean it is going to happen and soon.  It happened, the Fed this evening announced an increase in the discount rate to 0.75% from 0.50%, moving it closer to its pre-crisis spread to the Fed Funds Rate of 100bps.  Undoubtedly, this is a prelude to additional less accommodative monetary policies, which will likely begin with the end of quantitative easing at the end of this quarter, followed the by eventual sale of assets from the Fed balance sheet, and eventual rate hikes for both the target rate and interest on excess reserves.  I do not anticipate we will see a hike in the benchmark rate until at least November of this year, given what I anticipate will be tepid growth and high unemployment.

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