Economists Say Fed May Increase Discount Rate Before Next Meeting

Bloomberg reports that the next meeting of the Federal Open Market Committee is scheduled for April 28. Economists are of the view that before this meeting the Federal Reserve is likely to increase the discount rate charged on the direct loans to banks.

This speculation started circulating after one month from February 18 when the Fed had announced an increase in the discount rate; this was a first in three years. This move had widened the discount rate’s spread over the benchmark federal funds rate to 0.5%. This move was described by the Fed as ‘normalization of the Federal Reserve’s lending facilities’ and the Fed had said that it was in no way a signal of a change in the outlook for monetary policy or the economy.

Lou Crandall, the chief economist at Wrightson ICAP LLC said that “There has been no decline in borrowings since the discount-rate increase, which is why it is entirely possible they want to raise the discount rate in the days ahead.” At a briefing on March 15, Laurence Meyer, a former Fed Governor who is now Vice Chairman of Macroeconomic Advisers LLC in Washington said “Another increase in the discount rate could be coming soon. The case for doing it sooner rather than later is clear- cut. The sooner the next increase comes, the easier it will be to convince market participants that discount rate decisions at this point are all about liquidity policy and have nothing to do with monetary policy.”

US stocks saw a lot of fluctuation on this news about the economists’ views. The market cheered evidence of the economy strengthening without spurring inflation; however, speculation about possibility of the Fed raising the discount rate raised concerns.