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Fed Hikes Emergency Lending Rate

The action won’t directly affect borrowing costs for millions of Americans. But with the worst of the crisis over, it brings the Fed’s main crisis lending programme closer to normal.

The Fed chose to bump up the so-called “discount” lending rate by one-quarter point to 0.75 per cent. It took effect on Friday.

The Central Bank said the step should not be seen as a signal that it will soon boost interest rates for consumers and businesses. It repeated its pledge to keep such rates at record-low levels for an “extended period” to foster the economic recovery.

The Fed had signalled for weeks that a higher discount rate was coming, though the timing of Thursday’s decision caught some by surprise. It portrayed its action as moving its emergency programme for banks closer to normal.

The announcement came after the financial markets had closed. Investors saw it initially as a prelude to higher borrowing costs across the board. In after-hours trading, the dollar strengthened on the expectation of higher rates. Yields on two-year Treasury securities rose, and stock futures dipped.

After the sell-off in stock futures, Pimco Managing Director Bill Gross warned investors not to overreact.

“I’d accept the Fed at its word — that this isn’t a change in monetary policy or in the timing of it,” he said. “Calmer heads may prevail tomorrow.”

T.J. Marta, a market strategist, said he thinks higher rates for American borrowers are still months away.

The Fed has kept the target range for its main interest rate — the federal funds rate — at between zero and 0.25 percent since December 2008.

After the Fed’s action on Thursday, economists said they still believe it won’t start to boost borrowing costs for Americans until later this year. Some don’t think it will happen until next year, given the fragile recovery.

Chairman Ben Bernanke last week signalled the Fed is in no rush to boost rates.

When the time does come, Bernanke said the Fed will likely start to tighten credit by raising the rate it pays banks on money they leave at the Central Bank. Doing so would raise rates tied to commercial banks’ prime rate and affect many consumer loans. That would mark a shift away from the federal funds rate, its main lever since the 1980s.