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Fed signals end to cheap money supply
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KAI RYSSDAL: You know, one of the things we can count on with the Federal Reserve is predictability. We know when it’s going to have an interest rate meeting. We know when Chairman Ben Bernanke is going to give a speech. And we know, or at least we have a pretty good idea, of what he is going to do with interest rates.
That’s why what the Fed did yesterday with something called the discount rate is worth talking about. It bumped the discount rate, what it charges banks for emergency loans, a quarter percentage point higher. And it did it in the monetary policy equivalent of the dead of night. Five in the afternoon on a Thursday, after the markets had closed and between regular meetings. Not all that predictable, I would say. The speculation started right away, that the more important federal funds rate was sure to go up soon, too.
Our Washington bureau chief John Dimsdale explains.
John Dimsdale: The Fed says its move will not affect businesses or consumers and no higher interest rates are in sight. The discount rate hike was certainly no surprise. Just over a week ago, Fed chairman Ben Bernanke predicted it would happen soon.
T. Rowe Price economist Alan Levenson says Bernanke is trying to signal the supply of cheap money isn’t forever.
Alan Levenson: No one’s stepping on the brakes. I’m not trying to stop the car. But we’ve been going up a very steep hill. I’ve been flooring it. The grade is leveling out now. I’m not even easing off the gas, I’m just getting ready to ease off the gas, so that we don’t start going too fast as the grade flattens out.
Levenson says the Fed is more confident banks can fend for themselves. But potential potholes in the recovery are keeping the Fed from abandoning it’s easy money policy any sooner, says Christian Weller at the Center for American Progress.
Christian Weller: In particular, we still have large foreclosures in the residential housing market, but also in the commercial mortgage market. It’s always been prudent policy for the Fed to actually signal what it plans to do so the market can adjust, people can adjust accordingly.
The mere anticipation of a stronger economy is propping up the dollar. Worldwide, more people will invest in the U.S. currency, driving up its value and taming inflation, says Wharton School finance professor Jeremy Siegel.
Jeremy Siegel: It’s good if imported costs go down, which could include oil and other materials. It is tougher for exporters. Net, I think it’s a good thing for the American people and the consumer. But if the dollar rose much more, it does pinch corporate profits in the short run.
These economists expect more baby steps from the Fed this spring. Perhaps another bump in the discount rate. The Fed has already announced it will stop buying the banks’ mortgage-backed securities in March. Interest rate hikes, though, are still at least six months away.
In Washington, I’m John Dimsdale for Marketplace.
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