"The move is Symbolic but the Real Target was Inflation

Sydney M. Williams

Thought of the Day

“The Move is Symbolic but the Real Target was Inflation”

February 19, 2010

In a not unexpected move the Federal Reserve yesterday afternoon raised the Discount Rate. (In fact, yesterday, in my Thought of the Day, I wrote, “…the Fed may choose to raise the Discount Rate (the rate the Federal Reserve charges depository institutions) sooner rather than later.”)

While the Fed statement said that the increase “does not signal any change in the outlook for the economy or for monetary policy” the increase, in my opinion, does reflect that one, the patient (the economy) is out of intensive care and second, and to my mind more important, it is a preemptive move against inflation. TIPS (Treasury Inflation Protected Securities) prices have been assuming better than three percent inflation and, as The Wall Street Journal writes this morning, in an editorial, wholesale prices, over the past six months, are running 9.6% ahead of a year earlier.

The move is symbolic, in that of an estimated $10 trillion in bank liabilities only $15 billion are owed to the Fed. While futures are pointing to a lower opening for the market, it is my view this a positive move. Whether the move signals that the Fed believes the worst of the recession is behind us, or that deflation is no longer a risk, that’s positive, not negative.