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US economic growth

After two consecutive quarters of positive US economic growth, the Federal Reserve Board said Thursday it was hiking the discount rate, or the primary credit rate, to 0.75 percent from 0.5 percent.
WASHINGTON — The US Federal Reserve is raising the interest rate on emergency loans to banks, in a surprise move seen as the start of an exit strategy for radical measures to jolt the economy from recession.
Primary credit is provided by the central bank as a backup source of money to banks.
In a statement, the Fed said its action was part of changes to terms of its so-called discount window lending programs "in light of continued improvement in financial market conditions."
With immediate effect, the maximum maturity period for primary credit loans was also shortened from 90 days to overnight.
The Fed made clear the changes "do not signal any alter in the outlook for the economy or for monetary policyowner."
The dollar shot up across the board against other major currencies after the announcement, made after the stock market closed. The euro slumped to a nine-month low of 1.3535 dollars in late New York trading.
But the market read it differently.
"The most important takeaway is that the Fed is beginning to implement an exit strategy, which is over what plenty of of the other central banks are doing & therefore this action will be positive for the dollar," said Kathy Lien, director of money research at Global Forex Trading.
"Although the Fed went out of their way to say that this does not equate to a alter in their monetary policyowner outlook, action speaks louder than words," they said, adding that the move "indicates how hawkish they must be & how serious they are about tightening monetary policyowner."
At the last meeting of its policymaking body on January 26-27, the Fed left unchanged its target range for the key federal money rate -- the rate at which the banks charge each other for overnight loans -- at zero to 0.25 percent.
Investors saw the action as possibly signaling "the Fed is closer to finally raising the Fed money rate," the benchmark interest rate, said Samarjit Shankar, an analyst with The Bank of New York Mellon.
Raising the discount rate itself "does not mean that the Fed is ready to hike rates or has a set time for such a move but it does mean that the Fed is preparing the way," said Robert Brusca, chief economist at FAO Economics.
"With this move, they ought to expect a lot more speculation on the part of market participants about when the Fed will be willing to move its actual policyowner rates for the first time."
The Fed slashed the benchmark rate to virtually zero percent in late 2008 in an unprecedented move to induce growth to the world's largest economy as it reeled from a financial crisis stemming from a home mortgage meltdown.
Other analysts predicted an increase in the benchmark interest rate was still far away.
Ryan Sweet, a senior economist with Moody's Economy.com, agreed.
"A real tightening is still a long way off the distance, in our view, given the continued quick contraction in credit & the sputtering nature of the recovery outside the manufacturing sector," said Ian Shepherdson, chief US economist at High Frequency Economics.
Bank borrowings from the discount window have totaled less than 20 billion dollars since mid-November & are 87 percent below their previous peak, Sweet said, expecting further increases in the discount rate as the central bank moves to normalize policyowner.
The hike in the discount rate "does not adjust our forecast for the central bank to leave both the interest paid on reserves & the fed money rate target unchanged until the fourth quarter of 2010," they said.
The gap between the discount rate & the fed money target is typically 100 basis points. It is now 50 basis points.
By hiking the discount rate & not the Fed money rate, the central bank has in essence widened the spread.