Global equity markets have reacted negatively to the Federal Reserve’s decision to hike the discount rate by 25 basis points to 0.75% after the closing bell yesterday.
The Fed Funds rate remains in the zero to 0.25% range and in the policy statement the bank reiterated that rates will be kept low for “an extended period.” But no matter ― stocks in Asia and Europe sank in reaction, including by more by than 2% in Japan and Hong Kong.
In the US, the Dow looks to open 40 points lower at 10,335. Around 75 minutes before the opening bell, futures on the S&P 500 are off 6.2 points to 1,099.40. Also, WTI Crude oil is trading lower by $1.07 to $77.99 per barrel and Spot Gold is off 15 cents to $1,108.55.
“Financial markets aren’t buying the Fed’s story that the increase in the discount rate doesn’t signal an imminent tightening in policy rates,” wrote economist Sal Guatieri from BMO, who found the negative reaction perplexing. “It’s not clear why equities would weaken on the discount rate move, since it signals that the Fed believes the banking system and credit markets are no longer dependent on emergency liquidity support.”
After the news yesterday, Fed Governor Elizabeth Duke, a voter on the FOMC, said the rate hike reflects “further normalization of the Federal Reserve’s lending facilities,” adding that it “[does] not signal any change in the outlook for monetary policy.”
James Bullard, president of the St. Louis Fed, added that markets are “overly focused” on rates. He said the Fed Funds rate may not be hiked until 2011.
MND's Adam Quinones had this to say:
"Don't confuse the Fed Funds Rate with the Discount Rate. The Fed Funds Rate is the interest rate banks charge each other for the overnight sale of immediately available funds. Banks are lending to banks here. The Discount Rate is used when banks borrow funds from the Federal Reserve. These are funds that are not currently in the banking system. What the Fed is doing by raising the discount rate is limiting the amount of NEW MONEY that could be put into the banking system. Because there are currently over $1 trillion excess reserves already in the banking system...this move is not really a big deal. More than anything it's psychological. A reminder of the Fed's gradual withdrawal...."
For now, the clear winner of the day is the US dollar, which is enjoying its highest peak since May-09,
Key Events Today:
8:30 ― The Consumer Price Index is expected to show a headline gain of 0.3% in January and a core gain of 0.1%, reflecting a rise in oil prices but a pretty steady pace for prices at the retail level. The prior month recorded a 0.1% gain on both fronts.
“High unemployment is keeping a lid on wage gains and consumer demand, limiting the rise of core services prices,” said analysts at IHS Global Insight.
Analysts from BMO similarly noted: “Subdued inflation, enormous slack and a still-fragile recovery are the main reasons the Fed expects to keep rates steady for an ‘extended period,’ likely until September.”
The Mortgage Bankers Association will release the 4th Quarter National Delinquency Survey this morning. Conducted quarterly since 1972, MBA's National Delinquency Survey covers more than 40 million loans on one-to-four-unit residential properties, representing more than 80 percent of all first-lien residential mortgage loans outstanding in the United States. The NDS provides delinquency and foreclosure rates at the national, regional and state levels. Rates are reported by length of delinquency (30 days, 60 days, 90 days or more), type of loan (prime, subprime, FHA and VA), and for fixed-rate and adjustable-rate mortgages.
