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Commentary

Markets react to rising discount rate

Steve Chiotakis Feb 19, 2010
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Commentary

Markets react to rising discount rate

Steve Chiotakis Feb 19, 2010
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TEXT OF INTERVIEW

Steve Chiotakis: After the market closed yesterday, the Federal Reserve raised the rate banks are charged for emergency loans. It’s called the discount rate, and it was hiked from half a percent to three-quarters of a percent. Marketplace’s Jeremy Hobson is with us live from our bureau in New York to talk about what it means. Good morning, Jeremy.

Jeremy Hobson: Good morning, Steve.

Chiotakis: So the Fed made this announcement after the market closed yesterday. Was it a big surprise?

Hobson: Not really. The Fed did signal in the minutes of its latest meeting that it was going to do this. It’s, as you said, the discount rate the Fed charges banks for emergency loans. Now it was used heavily when all the banks were in the midst of an emergency right after the financial crisis — they all needed cheap cash. But it hasn’t been used much recently, and for that reason this move is being seen as more of a symbolic move.

Chiotakis: All right symbolic, I mean this doesn’t mean the Fed is going to start a broad tightening of monetary policy, does it?

Hobson: Well the Fed says this doesn’t mean that, but the market thinks it does. Rates have been very low since 2008 and people know it’s only a matter of time before they rise. I spoke with Dan Cook, who’s the senior market analyst at IG Markets, and he says he’s taking this as a sign that the Fed is really ready to start pulling back some of the emergency measures it put in place after the collapse of Lehman Brothers.

Dan Cook: It might signal that the Fed’s not going to wait, as they traditionally have, for employment to substantially improve, that they might move ahead faster than a lot of people initially suspected, including myself.

Now Cook says that the initial impact of that will be a rise in the dollar and a fall in stocks, both of which, Steve, we’re already seeing.

Chiotakis: Marketplace’s Jeremy Hobson in New York. Jeremy, thanks.

Hobson: Thank you.

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