The Fed is loosening not tightening
Simon Ward
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The rise in the Fed's discount rate from 0.5% to 0.75% will apply to $15 billion of outstanding primary and secondary credit loans, as of Wednesday. Such lending peaked at about $112 billion in October 2008.
The US monetary base, meanwhile, rose by a further $53 billion in the week to Wednesday, to a record $2.13 trillion – see chart. The increase reflected Fed securities puchases and an outflow of cash from the Treasury's account at the central bank, factors that offset a fall in lending under the term auction facility. (The monetary base comprises currency in circulation and banks' reserve balances at the Fed.)
Remaining securities buying and the completion of recent transactions should result in a further expansion of the monetary base, even allowing for paydown of discount window loans and other emergency lending – see previous post.
The Fed may begin to reverse its super-loose monetary stance this summer but the discount rate hike is a false alarm.
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