Easy money is about to get a little less easy. Emphasis on the little.
Today the Federal Reserve announced that it would raise the interest rate it charges banks on emergency loans from 0.5% to 0.75%, effective tomorrow. In addition, on March 18, the Fed will shorten the length of time banks can borrow from the discount window back down to overnight, where it has historically been. Finally, the minimum bid rate for the Fed’s Term Auction Facility—a program meant to ease short-term lending—will go from 0.25% to 0.50%, and then such auctions will end on March 8.
And so the Great Unwind begins. In the wake of the financial-system meltdown, the Federal Reserve, like other central banks around the world, flooded markets with ridiculous amounts of liquidity in a desperate attempt to keep recession from rolling into depression.
Now that the economy is starting to find its feet again, it’s time to begin undoing all that easy money. What does that mean for the loans individuals and business take out?
Not much, according to the Fed. From a statement explaining today’s moves:
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, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The changes announced today, which were previewed in Chairman Ben Bernanke’s February 10 Congressional testimony, all have to do with special lending facilities and rules meant to preserve the stability of the banking system. The main federal funds rate, which effects your life through things like how much you pay for a mortgage, has yet to budge, and likely won’t until much later this year.
Though that change is coming eventually, too. From Bernanke’s February 10 testimony:
The economy continues to require the support of accommodative monetary policies. However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so.
