"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Friday, February 19, 2010

Fed raises discount rate - big mistake

Fed raised the discount rate. Most probably this is a big mistake. Quick and dirty attempt at a charitable interpretation of the rate hike:

  • Stability of short term nominal interest rates is overrated. This hike can be easily reversed in future.
  • This is a price Bernanke has paid for keeping Fed funds rate at near zero for an extended period.
  • This is a price Bernanke has paid for not reversing QE.
  • This is just a way to have a tiny symbolic tightening without restarting the interest rate cycle 

More worryingly, this action again confirms that Fed believes that manipulation of short term risk free interest rates is all that we need to ensure economic recovery.

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