The Fed Raises the Discount Rate to 0.75% - Not a Sign of Tightening

The Fed today released a statement saying that it was raising the Discount Rate, the rate it charges banks for overnight loans, from .50% to 0.75%. This change was expected and the Fed was careful to point out that it still expects to keep the more influential Fed Funds rate low for some time.

Here's the statement from the Fed on how the rate change will impact consumer interest rates:

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

As this article points out, the discount rate is not as influential as the Fed Funds rate in impacting interest rates and monetary policy. Nevertheless, there was a reaction in financial markets today. The dollar spiked and stocks retreated while in bond markets, Treasury prices fell and yields moved higher. These are all typical responses to anticipated higher interest rates.