Market Notes - February 19, 2010

Stock index futures were pointing to a weak start as investors initially react to the Fed’s decision to raise the discount rate. However, futures climbed from their lows after the Consumer Price Index showed that inflation is still not a threat.

The discount rate is what the Fed charges banks that borrow from the central bank when they run short of funds. The Fed announced late Thursday it is raising its discount rate by a quarter percentage point, or 25 basis points, to 0.75%. The central bank said in a statement it made the move in response to improving financial conditions and also said the increase should “encourage institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility as a backup source of funds.” The decision has no effect on the more widely watched federal funds rate, which measures the rate banks charge each other for overnight loans. That rate is expected to remain between 0% and 0.25% for the foreseeable future. An announcement like this often results in a short-term over-reaction by the market. But to keep this in perspective, this move and any additionally tightening is simply a shift from the emergency policy response to last years crisis, to a still very accommodative policy.