Fed Raises Discount Rate After Hours, Stocks Drop

Thursday, February 18, 2010

  • The most significant news of the day came at 4:30 PM. After stocks slowly trudged higher throughout the day gaining 84 points (0.81%) at the close, the Federal Reserve announced after the market that they are raising the discount rate by 25 basis points to 0.75% effective tomorrow. The last policy statement had hinted that they were considering using this rate as the beginnings of a renewed tightening cycle. Stocks had given back all of today's gains after hours and look likely to open significantly lower in tomorrow's trade.

  • The dollar jumped with the Fed's action as well trading as much as 1% higher. This will likely halt the advances in commodities seen in the last few sessions. The rate increase comes on the back of a day that saw another record steepness in the yield curve.

  • I believe the true test of Bernanke's brilliance will come over the next few years. His stewardship over the Panic of 2008 was extraordinary regardless of my own critiquing. Yet, now he must "land [the] plane in heavy fog on a runway with mountains on one side, and the ocean on the other" (Taleb). He must avoid a double-dip recession, a deflationary spiral and runaway inflation, all feared outcomes after the unprecedented steps taken in creating the most aggressive expansionary monetary policy this country has ever seen. His real legacy will be formed in the coming years.
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