Discount Rate Increases 25 Points... So What?

All for show, not for go. The Federal Reserve has raised the discount rate – the rate it charges banks for short-term loans – by 25 points, to 0.75%.

“It used to be a sin,” our friend Chuck Butler commented this morning in The Daily Pfennig, “to have to go to the ‘discount window’ and borrow from the Fed. But these days, it’s like a walk in the park…nobody watches, and nobody cares!”

The Fed’s move was expected. The timing was not. Rather than wait till its regular meeting next month, the Fed pulled the trigger after the market close yesterday…and before options expiration today.

It’s the first increase in the discount rate since the Fed entered Bear Stearns panic mode by cutting the rate on Aug. 16, 2007 – also outside a regular Fed meeting, also on a Thursday before options expiration.

Anyone with call options on the indexes is hurting this morning.

Still, “this move is more cosmetic than anything,” cautions Dan Amoss. “It’s a drop in the bucket compared with the flood of new money the Fed created for quantitative easing programs. Yesterday’s announcement seems designed to silence the critics who say the Fed will never tighten again, and is engaged in backdoor monetization of the national debt.

“The Fed and Treasury Department are involved in a poorly disclosed, conniving plan to recapitalize Fannie Mae and Freddie Mac without going to Congress for funding authorization. They are doing this through the quantitative easing program and Treasury’s Dec. 24 announcement of unlimited capital support for Fannie and Freddie.

“Quantitative easing is the more important policy tool being employed by the Fed right now. The Fed will maintain focus on quantitative easing until the bond market revolts by selling off Treasuries. The more important development later in 2010 might be the bond market forcing the Fed to follow it into raising the cost of borrowing for both the government and the private sector.”