Ebb and Flow

In a surprise move today, the Federal Reserve raised the somewhat low-profile discount rate from 0.50% to 0.75%. Supposedly, they are backing away from “emergency” operations and things are slowly getting back to “normal”.

In the great scheme of things, this doesn’t sound like much, but rate cycles are long term events and while we shouldn’t be quick to signal a change, this is perhaps a test case for many more potential rate hikes to come.

Meanwhile, the currency markets have had an unsettlingly volatile feel to them for months.  Tomorrow should throw a little bit more fuel onto the fire, as interpretations of the rate hike will likely be “dollar positive” – although it’s hard to defend that point of view logically.

But the truth is that this is likely more smoke and mirrors.  Sure, the market has made a dramatic recovery and at some point interest rates will be pulled uncontrollably higher – but Bernanke is no protector of the currency.  We have already witnessed extraordinary efforts to simulate lower and lower interest rates that sometimes seem to violate every free market principle all at once.

In any case, the Fed has its hands full from a monetary standpoint and will likely be unable to simultaneously handle the looming fiscal crisis (assuming they want to) as the federal government’s budget balloons out of control.  Raising interest rates will only, one imagines, act to sacrifice the stock market to the bond market for a short time.

And yet… it seems like no one at the Federal Reserve or the  administration has been doing anything but biding time for years.