Federal Reserve raises discount rate, what does it mean for us?
In a surprising and underhanded way , yesterday after the market closed the Federal Reserve raised the discount rate from .50% to .75%! Before we get into what this means, the fact that a major policy change was announced just before the third Friday of the month leaves much to be desired. This is because all third Fridays are option expiration days and the market always reacts violently to any unexpected decision from the Fed. Although today's market open looks rather timid overnight futures were showing significant losses and I bet some people who were positioned long were thinking of creative ways to water board Bernanke and set fire to the Federal Reserve building. So what is the discount rate? This is the rate that the central banks charge for doing business with the member banks if the member banks need cash. If you were to imagine the entire Federal Reserve structure it is a giant pyramid. On top sits the main Federal Reserve and under him are smaller Reserve banks.