Fed Announces Surprise Hike In Discount Rate

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The Federal Reserve Thursday announced a surprise hike in the interest rate it charges banks for emergency loans.

Responding to what it said was "continued improvement in financial market conditions," the fed said it is increasing the so-called discount rate by 25 basis points to 0.75 percent.

The Fed statement, released after the close of trading for the day, said the moves were approved unanimously by the Federal Reserve Board, and would take effect on Friday, February 19th.

While the move drew an immediate spike in the U.S. dollar on feelings a tightening of credit was nearing, the Fed attempted to dispel the notion. It repeated its previous statement that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

In a statement accompanying the action, the fed said "Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserves lending facilities."

The fed said the move widens the spread between the primary credit rate and the top of the federal funds target rate to 0 to 0.50 percent from the previous 0 to 0.25 percent.

"The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds," the fed said.

The Fed said its moves were intended to "normalize" its operations as its response to the financial crisis winds down.

"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," the Fed said.

(Market News Provided by RTTNews)