Federal Reserve Makes First Step Toward Economic Normal

Since the financial market crisis began in late 2008 the Federal Reserve has been all about making moves that will help financial institutions survive the credit crisis. The Federal Reserve has taken action and changed its policies to make credit much more available to banks and other finance related institutions. The moves have definitely made a difference and created a system that is much more stable than it was a year ago. While the financial system now is nowhere near where it should be, without these sweeping changes by the Federal Reserve things could be a whole lot worse.

The net effect of these changes to make credit much easier to receive has been good, but over the last few months there has been an increasing amount of chatter regarding when the Federal Reserve will get things going back in the direction of normal. Late on Thursday February 18, 2010 we received our answer, the Federal Reserve is ready to start slowly edging its policies back toward a more normal level. The Federal Reserve announced that it will raise the discount rate by a quarter point to 0.75 percent. In a statement the Federal Reserve mentioned that this move is aimed at encouraging financial institutions to rely on the market and traditional methods of obtaining credit, rather than using the Fed discount window.

It seems the market is very jittery following this move by the Federal Reserve. Stock futures are broadly lower and the main reason is likely because investors now fear that the Fed funds rate will soon be moving higher as well. In general, the stock market is not at all a fan of higher interest rates. In the grand scheme of things I believe this should all be kept in context. Realize that the typical discount rate is something more like 4 percent, not 0.75 percent as we are now going to be at. The Federal Reserve is making a wise move in beginning the process of unwinding the extraordinary measures that have been in place, but they are hinting that they will do so very carefully.

Quite simply put, it would not be healthy at all for the extraordinary measures that are in place right now to stay in place forever. Investors and consumers should take this as a positive sign overall, that the Federal Reserve is confident enough in the state of the economy to make this move.