By Markos N. Kaminis
The week just passed produced a whirlwind of market-moving information, the eye of which was not foreseen. At least it was not foreseen by most, while Wall Street Greek painted an accurate picture of how trading would unfold on Friday morning.
When the Federal Reserve hiked its Discount Rate, or the rate it charges banks for emergency borrowing, the market reacted. At least that’s what popular media would have you believe. The Federal Reserve action made for a flashy headline and jarring discussion, and it even moved stock futures following its release in the after-market. Truth be told though, it was a non-event. The Dow Jones Industrial Average finished unchanged Friday, and for the week, closed up 3%.
Wall Street Greek wrote about the Fed action in the early AM hours before Friday’s market open, preparing concerned investors for the trading day ahead. Followers of our daily insights were therefore unshaken on Friday morning when the bell rang. We wrote specifically:
After the close of trading Thursday, the Federal Reserve announced a unanimous decision to raise the Discount Rate from 1/2 percent to 3/4 percent. Stock futures gave back nearly a full percentage point in the after market, as traders hurriedly misinterpreted this market normalizing action for a sign the Fed was shifting into reverse. However, Federal Reserve Chairman Bernanke made it plainly clear last week that his Fed would not raise the Fed funds target rate anytime soon.
This discount rate action simply represents a movement toward normalcy, and it is something the market should have been better prepared for. The problem is that Fed speak had been mostly focused on the conclusion of asset purchase programs. The market had concluded this would occur first, and we could worry about other things later. Bernanke went wrong by not signaling the discount rate action as he did the securities markets plan.
As the crisis took hold, the Fed had to do whatever it could to make useful capital available to financial institutions in a bind, and to ensure the capital would be as little burdensome as possible (low rates, long terms). But now things are improved, and the Fed needs to reduce its balance sheet. It is reducing the term limit on this intended short-term funding and raising the cost of such capital. This is just one action of many planned for the process of unwinding, and it’s nothing to fear.
This change in the discount rate should have no affect on loan rates, CD rates, savings rates or credit card rates, but the market was worried about something else as the news hit the wire. The market grew stressed that the Federal Reserve might tighten credit too soon and burden an already dragging recovery. We think it’s clear that the Fed is not going to raise the Fed funds target rate anytime soon. The market looks ahead though, and so the dollar strengthened and stock futures retraced. “The Greek,” concluded before the start of trading, “I expect smart money will prevail and this early reaction will be likewise unwound with the special discount rate.” Once again, WallStreetGreek.com offered its followers actionable advice and valuable insight in a timely fashion.