Fed to Raise Interest Rate

Posted on Feb 19, 2010

Wikimedia Commons / United States Federal Reserve

The Federal Reserve is chaired by Ben Bernanke.

The Federal Reserve announced Thursday it would increase the interest rate for temporary bank loans. The New York Times reports that many on Wall Street see this as signaling an end to big bank profits. But some economists say the move was purely technical, with no real effect on how much money is made.

In 2009 the interest rate for short-term loans was made artificially low to induce banks to give out loans, while long-term interest rates were kept at normal levels. This difference was used by banks to make considerable profit, though economists say the discounted rate is no longer a factor for banks.

In real news, the Fed’s raising of the interest rate may be a sign that a collapse of the banking sector has run its course, and that banks no longer need the incentive to issue short-term loans, as they did one year ago. —JCL

The New York Times:

Federal Reserve to Wall Street: The days of easy money — and, just maybe, easy profits — are numbered.

News on Thursday that the Fed would raise the interest rate that it charges banks for temporary loans was seen by lenders as a sign that their long, profitable period of ultralow rates was coming to an end.

The move suggested that policy makers believed the nation’s banks had healed enough to withdraw some of the extraordinary support that Washington put in place during the financial crisis. And, while all those bailouts stabilized the banking industry, it was low rates from the Fed that helped propel banks’ rapid recovery.

Even though the Fed had telegraphed its intention to raise the largely symbolic discount rate, the timing of the move, coming between scheduled policy meetings, caught some economists by surprise. Stocks and bonds sank in after-hours trading, suggesting Friday could be an anxious day for the markets.

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