Fed Raises Short-Term Interest Rates

By:
Peter King | February 19, 2010

The Federal Reserve is making a small increase in the rate it charges banks for short-term loans, a long-anticipated first step towards backing off the easy money policy it has pursued over the past year.

The Fed announced late Thursday that it is raising the discount rate one-quarter percent to 0.75 percent, effective today. Effective March 18, the Fed will also limit the maximum duration of such loans to overnight.
 
The action was described as a move toward normalizing credit markets in light of improving economic conditions. The Fed said raising the rate should encourage banks to seek private sources of short-term credit rather than turning to the Fed.
 
It’s not clear what impact raising the discount rate might have on mortgage rates, which have held near all-time lows for much of the past year. However, the Fed’s major impact on mortgage rates has been as a result of its commitment to purchase over $1 trillion in mortgage securities, which are set to conclude in March. Most analysts do not expect mortgage rates to rise significantly until that program concludes.
 
Some analysts predict that raising the discount rate will have little immediate impact, as relatively few banks use the program. A more significant impact would result from raising the Federal Fund rate, the rate banks charge each other for short-term loans, which the Fed is expected to keep at zero to one-quarter percent for some time to come.
 

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