oppss!! federal reserve raises discount rate

In the depths of the 2007-08 financial crisis, the Federal Reserve urged the biggest banks to step up to its discount window, pushing the industry to get over the stigma on borrowing from the Fed.

When banks stopped lending to each other overnight altogether in the fall of 2008, discount window borrowing became even more crucial. The Fed even narrowed the penalty banks paid for using discount window money, moving the discount rate closer to the Federal funds rate during the crisis.

Now that the crisis has blown over, the Fed wants things to get back to normal. Late Thursday afternoon, it surprised the markets by raising the discount rate it charges though its emergency window to 0.75% from 0.50% while keeping its targeted Federal funds rate at between zero and 0.25%. The change will take effect on Friday. Meanwhile, the duration of the loans will revert to the normal overnight period from 30 days come mid-March. Though many thought the Fed was headed in this direction, most everyone thought it wouldn’t act until its next Open Market Committee meeting next month.

The Fed explained in a brief statement that it wants banks to return to the private debt markets. The increase “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 central bank added the move was not a signal it was tightening money nor a signal its outlook on the economy had changed. It is a further indication, however, that the government is pulling away from the extraordinary assistance it has given the financial markets over the last few years.

Later this spring the Fed is expected to stop buying mortgage-backed securities, a move that is worrying those in the housing markets who had hoped for a smooth recovery. The government’s numerous bank industry lifelines have been criticized for allowing banks to make heaps of money by borrowing from the Fed at next to nothing and profiting from the spreads they can make by investing that cash in the Treasury markets. But the Fed also has to come up with an exit strategy for a balance sheet that has become bloated with Wall Street’s unwanted assets. Forcing banks back to the short-term debt markets for funding (or even to rely on their own deposit taking operations) is another baby step to getting the banks out of the emergency safety net.

http://blogs.forbes.com/streettalk/2010/02/18/surprise-fed-raises-discount-rate/?boxes=Homepagetopnews

China banks ordered to increase reserves again

China has ordered banks to increase their reserves for a second time this year, as lending is curbed in a bid to stop the country’s economy overheating.

Analysts had expected the central bank to increase reserve levels again, but were surprised it ordered a second increase so soon after January’s move.
The bank has told commercial lenders to hike their reserve levels by 0.5%, to 16.5%, by 25 February.
China’s economy grew 10.7% in the final quarter of 2009 against a year earlier.
For the whole of last year, it expanded by 8.7%.

Further increases

“The central bank is sending out clear messages to banks that it wants more reasonable bank lending and it is paying close attention to inflation,” said Xie Xuecheng at Southwest Securities in Beijing.
Figures published by the central bank on Thursday showed that last month’s increase in reserves held by banks did little to rein in lending.
Lending by Chinese banks hit 1.4 trillion yuan ($205bn; £131bn) in January, one of the highest monthly totals on record.
This means further increases in bank reserves are likely, analysts said.
“The hike will still not fundamentally tighten liquidity too much and there will be more reserve hikes upcoming,” said Shi Lei at the Bank of China.

source:

http://news.bbc.co.uk/2/hi/business/8512480.stm