Friday, February 19, 2010

Fed Discount Hike No Issue

The Fed's decision to hike the discount rate (announced after the close on Thursday) created a bit of a stir in Japan's markets, but barely elicited a yawn in the US. Market participants shrugged off the Federal reserve's surprise announcement to hike the emergency rate at the discount window from half a percent to 3/4 percent (0.75) and dial back the repayment time from 30 days to 24 hours - the normal time period for what used to be known as "overnight" loans - and pulled markets into positive territory for the fourth straight session.

PIMCO's Bill Gross believes that the "surprise" Fed move was simply to appease inflation hawks on the Fed's Board of Governors, and that real rates would remain low.

Dow 10,402.35, +9.45 (0.09%)
NASDAQ 2,243.87, +2.16 (0.10%)
S&P 500 1,109.17, +2.42 (0.22%)
NYSE Composite 7,083.25, +2.87 (0.04%)

Despite the tame headline numbers, advancers pounded decliners, 3612-2828, and new highs soared past new lows, 290-30. Volume was a bit above normal, owing to February options expiration.

NYSE Volume 4,586,752,500
NASDAQ Volume 2,132,987,000

Oil continued its absurd price gains, picking up 93 cents, to $79.99. Analysts believe as much as $30-35 in the price of a barrel of crude is due to speculation. Demand has been slack for months and there has been ample supply as well. The control of the oil futures markets by a handful of participants has distorted the true pricing by quite a degree, to he dismay of many a driver.

Gold gained $3.30, to $1,122.00, and silver bumped higher by 35 cents, to $16.41.

If the Fed's action was a signal that inflation was on the horizon, January CPI data might argue otherwise. Consumer prices gained just 0.2% in the month, with core prices - excluding food and energy - fell 0.1. These figures came in stark contrast to yesterday's release of PPI, which were higher on a relative basis.

Since the Fed's discount window-dressing was more symbolism than actual rate-adjusting, the inflation-deflation debate is likely to rage onward for months. Eventually, the deflationists are probably more correct in their overall assessment of the current condition than the market-oriented inflationists.

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