Thursday, February 18, 2010

Fed Governor Duke Sticks to In-House Line

Federal Reserve Governor Elizabeth Duke was the only Fed official today with a speaking engagement that began after the Fed announced its discount rate hike.

For the hard of hearing, and those who have difficulty in comprehension, she repeated the Fed's in-house line on the discount rate hike.

The hike in the discount rate to 0.75 percent from 0.5 percent, effective Friday, and the earlier ending of some extraordinary credit programs represent "further normalization of the Federal Reserve's lending facilities" and nothing more, said Duke, reports Reuters.

"They do not signal any change in the outlook for monetary policy and are not expected to lead to tighter financial conditions for households and businesses," she said in an address at the Economics Club of Hampton Roads, in Norfolk, Virginia.

Of more significance, she also brought up the point that the Fed will likely target the rate on excess reserves (IOER) rather than the Fed Funds rate in the future. Reuters reported it this way:
In a brief question-and-answer session with the audience afterward, Duke said that in the future the rate of interest that the Fed pays on reserves that banks keep with it likely will become a key policy tool.
Although Duke is correct in stating that the discount rate hike does not have any practical impact on current monetary policy. It should be viewed as a softening of the ground for a future increase in the IOER and the Fed Funds rate.

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