18 February 2010

Managing Perceptions: Fed Raises Discount Rate After the Close

"The last duty of a central banker is to tell the public the truth." Alan Blinder, former Vice Chairman of the Federal Reserve

In a largely symbolic move, the Fed raised the Discount Rate after the bell by 25 basis points to .75%.

As you know, the Discount Rate is the interest rate that the Fed charges banks who borrow from them short term on an emergency basis.

This is the shaping of perception by the Fed. It does not raise rates for the consumer or businesses, and does not affect the rates and guarantees in the many Fed and Treasury programs which are still supporting the commercial banks.

One has to wonder why the Fed chose to jawbone at this time. Is this a move to help them with next week's $100+ Billion Treasury auction? We are discounting rumours that the nose counts among the Primary Dealers showed the risk of another 'failed' auction was rising.

Or was this mainly to provide another opportunity for the bullion banks to take the prices down ahead of their option expiration next week? Plan B stands for Bernays.
"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K." Eddie George, Bank of England Governor to Nicholas J. Morrell

Its all about managing perception.

When the Fed starts backing off on quantitative easing, we will know that things are truly changing. Bernanke is all too aware of the Fed's policy error in 1931 of raises rates prematurely, which caused the second leg down to the trough of the Depression in 1933. So let the Fed wave their hands all they want, but watch the Adjusted Monetary Base. In other words, its not what they say, but rather what they do.

One wonders if Obama is also aware of Hoover's policy error in trying to balance the budget as the nation slid into the most serious part of the Great Depression. He is certainly no FDR, and the nation is unlikely to be on the road to recovery during his hapless Administration. Will he, like Greenspan, later confess that he erred for a theory, a mistaken belief? A small comfort for those they have ruined.

Man wird nie betrogen, man betrügt sich selbst.
[We are never deceived; we but deceive ourselves.]
Johann Wolfgang von Goethe

Fed Raises Discount Rate Quarter Percentage Point

WASHINGTON— The U.S. Federal Reserve Thursday raised the rate it charges banks for emergency loans by a quarter percentage point, but emphasized that the step didn't represent a broader tightening of credit.

In a widely expected move, the U.S. central bank said the increase in the discount rate to 75 basis points from half a point was part of its step away from its emergency-lending efforts. The increase will be effective from Friday.

"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 Fed said in a statement...