The era of billion-dollar bailouts and an economy stuffed to the gills with money virtually created out of thin air is drawing to a close.
The unprecedented actions by the federal government to stave off economic collapse had to end sometime. And a variety of local bank analysts, financial advisers, chief financial officers and others regard Friday’s announced hike in the Federal Reserve’s discount rate as a step – albeit an early one – in that direction.
The discount rate is the interest rate at which banks borrow on loans directly from the Fed.
By itself, the incremental move – from .50 percent to .75 percent – is not significant, but it’s regarded in some circles as a sign the Fed is closer to taking away the so-called punch bowl and is nudging the economy back to business as usual.
‘Beginning of the end’
Federal Reserve chairman Ben Bernanke is expected to elaborate on that thought Wednesday, when he begins two days of testimony to Congress.
He’s expected to stress that the discount rate hike does not affect the Fed’s commitment to keeping its key policy rate – the one linked to the interest rate consumers pay on loan products – low for an extended period of time.
“The raise (in the discount rate) is really not a very significant number,” said Duncan Williams, president of Memphis-based investment firm Duncan Williams Inc. “But what the Fed is saying to everyone is that the U.S. government cannot continue to do business for free.
“It is the beginning of the end of the bailout.”
When he came to Memphis last week for a speech to the Economic Club of Memphis, St. Louis Fed president James Bullard cautioned against expecting a raise in the Fed funds rate until likely sometime in 2011.
Nevertheless, moves like last week’s discount rate hike and Bernanke’s testimony this week are being scoured for clues about what kind of timetable they signal.
In a statement accompanying news of the discount rate hike, the Fed assured the move would not lead to “tighter financial conditions for households and business.”
The Fed said monetary policy remains about the same, with the agency still adhering to its intent to keep the fed fund rate at “exceptionally low levels” for an extended period.
David Pontius, pension investment manager for Shelby County government, points out because rates are near zero, the only direction they can go is up.
“It’s just a matter of when,” he said.
Symbolism or substance?
Dale Stover, chief financial officer for the Bank of Bartlett, said the Fed is slowly moving the economy back to normalcy. He also said a hike in the Fed’s key rate is not likely until the end of this year or in early 2011.
“I think what you are seeing is the beginning of the realization by the Fed that rates cannot remain where they are without significantly increasing the inflationary threat,” Stover said. “The move definitely serves as recognition by the board that the financial markets’ condition has improved.”
Bob Patten, a bank analyst at Memphis-based Morgan Keegan & Co. Inc., said the market initially reacted negatively on word of the rate increase but should eventually settle down.
Said Stephen Rhea, principal at Summit Asset Management in Memphis: “The Fed hike is more symbolic than substance.”
By Andy Meek – memphisdailynews.com
Add A Comment