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US Fed members insists borrowing costs will remain low

Saturday, February 20th 2010 - 21:20 UTC
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Last week’s increase of the discount rate took markets by surprise Last week’s increase of the discount rate took markets by surprise

The US Federal Reserve poured cold water on speculation that a surprise hike to its emergency lending rate signalled a change in monetary policy, saying borrowing costs in the economy would remain low.

The president of the New York Fed, William Dudley, said the central bank's pledge to keep benchmark borrowing costs low for an extended period of time “is still very much in place.”

The Fed raised its discount rate by a quarter percentage point to 0.75% late Thursday, after the close of US financial markets. Three Fed officials on Thursday evening had also stressed that the move did not represent a tightening of US monetary policy.

The US dollar jumped, US Treasury bond prices fell and stock futures slipped immediately after the discount rate hike, as investors bet the change represented the start of the Fed's retreat from its easy money policy. Stocks initially fell further, but reversed course as investors saw the rate hike as a sign of strength in the economy.

Dudley, speaking at a conference in San Juan, Puerto Rico, described Thursday's decision to lift the discount rate -- at which banks can borrow from the Fed -- as a small technical change that carried no broader signals about US monetary policy.

The benchmark federal funds rate for overnight inter-bank borrowing, the Fed's chief monetary policy tool, remains pegged near zero percent, an all-time low.

Though Fed Chairman Ben Bernanke last week had said that the US central bank could soon raise the discount rate, markets had not expected the Fed to act so quickly. The timing of the move on Thursday, after the US stock market had closed and well ahead of the central bank's March 16 policy meeting, prompted investors to price in a greater chance of a rise in the federal funds rate late this year.

Thursday's move was the first increase in any of the Fed's lending rates since the financial crisis blew up in 2007 and the first rate change since December 2008.

The government reported that US consumer prices excluding food and energy fell last month for the first time since 1982, helping government bond prices reverse some of the losses booked after Thursday's discount rate hike.

On Thursday, St. Louis Federal Reserve Bank President James Bullard said investors' belief in the high probability of a rise in the Fed's benchmark rate this year was “overblown” and that the discount rate rise should not be seen as a policy signal.

Also on Thursday Dennis Lockhart, president of the Atlanta Fed, said in a speech that “monetary policy, as evidenced by the fed funds rate target, remains accommodative,” which he said “is necessary to support a recovery that is in an early stage and, in my view, still fragile.”

Categories: Economy, United States.

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