Federal Reserve hikes short-term rate. Bank of Canada to raise rates soon. What now?

[yllus]

Thoughts from the financially savvy appreciated. If we're getting primed for a significant dip in the market, I (and others) would obviously like to have foreknowledge.

The Great Unwind begins

Easy money is about to get a little less easy. Emphasis on the little.

Today the Federal Reserve announced that it would raise the interest rate it charges banks on emergency loans from 0.5% to 0.75%, effective tomorrow. In addition, on March 18, the Fed will shorten the length of time banks can borrow from the discount window back down to overnight, where it has historically been. Finally, the minimum bid rate for the Fed's Term Auction Facility—a program meant to ease short-term lending—will go from 0.25% to 0.50%, and then such auctions will end on March 8.

And so the Great Unwind begins. In the wake of the financial-system meltdown, the Federal Reserve, like other central banks around the world, flooded markets with ridiculous amounts of liquidity in a desperate attempt to keep recession from rolling into depression.

Now that the economy is starting to find its feet again, it's time to begin undoing all that easy money. What does that mean for the loans individuals and business take out?

Not much, according to the Fed. From a statement explaining today's moves:

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.

The changes announced today, which were previewed in Chairman Ben Bernanke's February 10 Congressional testimony, all have to do with special lending facilities and rules meant to preserve the stability of the banking system. The main federal funds rate, which effects your life through things like how much you pay for a mortgage, has yet to budge, and likely won't until much later this year.

Though that change is coming eventually, too. From Bernanke's February 10 testimony:

The economy continues to require the support of accommodative monetary policies. However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so.

Let the countdown to rising rates begin

It's probably time to start the countdown on interest rates going up.

The Bank of Canada only pledged -- conditionally -- to keep its record-low lending rate until the end of the second quarter, so that leaves us with slightly more than four months before the housing market falls apart. At least that's what some national magazines and economists predict will happen when rates start to rise.

"Some people say they could go up in April, but I don't buy that," says Benjamin Tal, senior economist with CIBC World Markets and one of the more sane voices out there. He predicts a pullback in housing, but not the collapse we've seen in the United States.

 

[IronWing]

Maybe, just maybe, interest rates on savings will catch up with inflation.

 

[jman19]

Probably at least a few months away before we see any change in the Fed rate - possibly not until early 2011. They are going to be very cautious about not spooking the markets too soon... I do expect some impact to the futures market though (haven't looked yet today).

 

[heyheybooboo]

Thoughts from the financially savvy appreciated. If we're getting primed for a significant dip in the market, I (and others) would obviously like to have foreknowledge.

The Great Unwind begins



Let the countdown to rising rates begin

Since the Summer of 2007 the Fed has injected a butt-wadd (special financial terminology) of capital into the system through a myriad of special programs intended to grease liquidity between financial institutions.

The start of the 'unwinding' of these programs has been anticipated but that doesn't mean the 'market' will react in a rational manner.

edit: I found a simple 'scorecard' here.

The purported Bottom Line: $11 Trillion




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[Acanthus]

The rate is still near record lows.

The markets shouldn't respond at all other than a possible dip for the day.

 

[piasabird]

Cash flow is probably still pretty tight. If it gets more expensive to borrow short term for retail orders which are usually all purchased on short-term loans, then consumers just end up paying more or employers fire people to make up the difference or in a worst case, they just go out of business. Tighter money just means dividends decreas and profits decrease. (Stockholders lose money)

 

[juiio]

The discount rate is basically irrelevant right now. It is just the rate for banks borrowing from the Fed, and there is no need for banks to borrow from the Fed right now. There is very little borrowing from the Fed when compared to interbank lending. It is less than 1% of the Fed's balance sheet.

 

[juiio]

Why no one needs to borrow from the Fed

 

[dmcowen674]

Federal Reserve hikes short-term rate. Bank of Canada to raise rates soon. What now?http://www.financialpost.com/todays-paper/story.html?id=2559147

20% would be best, at least then credit card rates would not feel so bad.

 

[shiner]

20% would be best, at least then credit card rates would not feel so bad.

Maybe then you can finally get your $7 milk by paying for it with your credit card and then letting it ride.

 

[D1gger]

Maybe then you can finally get your $7 milk by paying for it with your credit card and then letting it ride.

But he might have to show his ID and sign a restricted goods form to get it.

 

[Darwin333]

Probably at least a few months away before we see any change in the Fed rate - possibly not until early 2011. They are going to be very cautious about not spooking the markets too soon... I do expect some impact to the futures market though (haven't looked yet today).

Do you really think they are concerned about the market? Maybe, just maybe, they are more concerned with keeping the cost of borrowing money for the government as low as possible? Do you have any idea how much our national budget increases from just a minor increase in the governments borrowing costs?

The Fed is fucked. They can't raise rates with the .gov borrowing as much money as it is. OTOH, this "free money" will end disastrously if not ended (maybe its already too late?) as well. My money is on them helping the government first, the economy second and their actual charter last.

 

[StageLeft]

Any idea when prime rate will follow? As that goes up it directly impacts me since I have a huge HELOC pegged to it, whoot!

 

[Darwin333]

The discount rate is basically irrelevant right now. It is just the rate for banks borrowing from the Fed, and there is no need for banks to borrow from the Fed right now. There is very little borrowing from the Fed when compared to interbank lending. It is less than 1% of the Fed's balance sheet.

87 billion dollars a day is irrelevant?

 

[juiio]

87 billion dollars a day is irrelevant?

It is nowhere near $87 billion per day.

RDQ’s John Ryding notes as well that loans via the discount window make up just 0.6% of the Fed’s balance sheet, at $14.2 billion.

The discount rate is basically irrelevant because there is roughly 900 billion dollars in excess reserves that can be loaned out via interbank loans.

 

[sandorski]

Those Rates are still practically Free. It had to happen eventually and it needs to be Increased ahead of a rush in order to avoid sudden over heated Growth. I suspect people will react with Caution, just to wait and see what the result of the move is, then when things don't fall apart, they'll begin taking some Risk again.