The US Federal Reserve yesterday made its first interest rate move since December 2008, hiking an emergency lending rate it charges banks, but insisted borrowing costs would not rise for consumers or companies.
The Fed cast its decision to raise the discount rate to 0.75 per cent from 0.5 per cent as a response to improved financial market conditions that warrant less of a helping hand from the US central bank.
It went to pains to draw a distinction between the discount rate and the federal funds interbank lending rate, its main monetary policy tool, which remains unchanged near zero per cent to help sustain a fragile US economic recovery.
"Like the closure of a number of extraordinary credit programmes earlier this month, these changes are intended as a further normalisation of the Federal Reserve's lending facilities," the Fed said in a statement.
"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," it said.
Fed officials fanned out across the country to emphasise that point.
"Monetary policy -- as evidenced by the fed funds rate target -- remains accommodative," Atlanta Federal Reserve bank president Dennis Lockhart said in Augusta, Georgia. Fed Governor Elizabeth Duke echoed the Fed's message in a speech in Norfolk, Virginia.
The decision, requested by all 12 regional Fed banks and approved unanimously by the central bank's board in Washington, takes effect today.
Despite the Fed's effort to distinguish its programmes to foster market liquidity from monetary policy, financial markets viewed the announcement as presaging an eventual policy shift.
US stock futures dropped sharply and government bond prices fell after the announcement, with the yield on policy-sensitive two-year notes touching their highest level since late January. The US dollar also rose, hitting a nine-month high against the euro and a one-month high against the yen.
Interest rate futures markets moved to price in about a 70 per cent chance of a hike in the Fed's main policy rate, the federal funds rate, by late September, up from 54 per cent.
Although Fed chairman Ben Bernanke said last week the central bank could soon raise the discount rate it charges on short-term loans to banks, the timing came as a surprise. The Fed usually moves the emergency loan rate in tandem with the overnight federal funds rate.
The central bank's view of the economy has brightened in recent months as job losses eased, consumer spending strengthened and businesses stepped up purchases of equipment and software.
Still, the Fed has cautioned that recovery from the deepest US recession since the 1930s will probably be sluggish and has said it expects to keep the federal funds rate near zero, where it has been since December 2008, for "an extended period."
In its statement it said the economic and policy outlook remained about the same as in late-January, when its policy committee reiterated that low-rate pledge.
Some other central banks around the world have begun to tighten policy. Australia led the way last year and its central bank chief signalled today more rate increases in months ahead while China took several steps to curb bank lending.
In the United States, however, the Fed has said extraordinarily low interest rates are still warranted with the unemployment rate near 10 per cent and much of the nation's industrial capacity still lying untapped.
US president Barack Obama, facing the prospect that his Democratic party will lose congressional seats in November elections, has said job creation is his top priority.
Before the financial crisis erupted in 2007, the discount rate was typically a full percentage point above the federal funds rate. The Fed's decision begins to move it back nearer its traditional premium.
Reuters