The Fed Begins to Raise Rates
Feb 22, 2010
Posted by Jody Eisenman | Filed under Uncategorized
Although Bernanke alluded to this recently, the Federal Reserve raised the discount rate by 25 basis points after the market closed yesterday. The discount rate is the rate that the Fed charges banks for temporary loans. With three month treasuries yielding 0.17%, it has been very easy for large banks to simply borrow money from the Fed at very cheap rates, and lend it out for huge profits. Look at it this way: If banks take in money from depositors at money market rates which average around one per cent, and then give mortgages for six percent, they make an enormous spread on their money. They make lots more from credit cards, where balances can be charged rates from the upper teens to over twenty per cent. Essentially, the Fed is signaling that the banks no longer need this assistance as their balance sheets have improved since the crisis of 2008-9.
As a practical matter, this may mean the beginning of the end to historically low rates. This will help depositors, but could signal a negative to the stock markets, which tend to thrive on low rates. As such, the market is looking a bit weaker. Over the next few days, I will discuss the effect of the US debt situation vis a vis interest rates.
