Following a massive increase in PPI (see story in prior posts) the Fed had no choice but to raise the cost of short-term loans, and begin to flatten the yield curve in the hope of curtailing bank lending.
The Fed is currently faced with a potential explosion in the money supply, and further increases in prices, the longer banks hold hundreds of billions of excess reserves.
As credit-worthy borrowers begin to reveal themselves through their earnings reports, banks will take notice, and make loans to individuals and businesses, increasing the money supply and inflationary pressure.
The only question now is, will the curve flatten?
Or, will the increase in long rates outpace the Fed's willingness to raise short rates?
* * * * * J B K * * * * *
San Francisco
Feb. 19 (Bloomberg) -- The Federal Reserve Board sent its most explicit signal yet that the emergency supply of liquidity to financial markets is done and the most aggressive monetary policy easing in its 96-year history will eventually reverse.
Chairman Ben S. Bernanke and his colleagues at the Board of Governors raised the rate charged to banks for direct loans by a quarter-point to 0.75 percent, effective today. It was the first increase in the discount rate since June 2006.
The Fed portrayed the decision as a "normalization" of lending that would have no impact on monetary policy, repeating in a statement in Washington yesterday that its benchmark federal funds rate would stay low for an "extended period." The assurances didn't stop investors from increasing bets that the Fed would tighten policy in the fourth quarter. The dollar rose and U.S. stock futures fell after the announcement.
http://www.bloomberg.com/apps/news?pid=20601068&sid=amj4X4IWKCys
