February 19th, 2010

Fed’s discount rate increase and effects.  The Fed announced today that they are increasing the Fed discount rate.  The first thing that many people wonder is if this decision is a good idea or not.

The immediate reaction is that an interest rate increase is a bad thing.  After all, the cost of housing will go up.  With the market already devastated, you would think that an increase in interest rates would be a bad thing.

This isn’t totally true. While it’s true that an increasing fed discount rate will make housing costs increase, it will also make savings rates increase.  What will this do? It will inspire people to keep money in the bank.

The immediate effects of the rate increase are that the dollar has reached a 9 month high.  In addition, the price of crude oil fell.  A reduced cost of crude oil will make consumers feel relief at the pumps.

For those that are skeptical of the rate increase you should note that there is an economic cycle that we have to go through.  The interest rates have been low for a very long time, and this has caused a lot of problems that must be rectified.  The changes could be difficult in the short term, but could possibly lead to better times in the long run.

The fed rate increase brought the key discount rate up a quarter point to .75%.  Many speculate that more increases could be felt in the future.

Source:

Bloomberg.com