Fed Raises Discount Rate to 0.75%
On the day when PPI came out +1.4% and Core +0.3% Fed raised the Discount Rate to 0.75%. Though it had been discussed and is most likely a symbolic gesture, the market is now wondering if the “exit” may now begin in earnest. Prior to the Fed action, the curve had made another new high, with 2/10 treasury spread over 293 bps, and red/gold pack spread 289. I would suspect the curve will flatten a bit in response to the Fed, but the dip might be shallow. Higher long end rates will surely be a test for both the Fed and Congress if they materialize. For those who are concerned about China boycotting US Treasuries, Obama’s meeting with the Dalia Lama could raise the tension level.
–There was also the incident of a disillusioned taxpayer who flew his small plane into an IRS building in Texas. This act also could be a symbolic step in a general march toward national disappointment with the gov’t.
–Today there are option expirations in stocks and treasury futures, (which makes the timing of yesterday’s Fed move a bit more surprising). CPI is also released, expected +0.3 and Core +0.1. Interestingly SPH had retraced almost exactly 62% at yesterday’s high. In my opinion it’s more likely that stocks lose their footing than bonds, causing further allocation into fixed income, but in any event the Fed has introduced a bit of uncertainty over the near term.
