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Prospects Daily: U.S. Federal Reserve raises emergency loans rate for 'Discount Window'

Global Macroeconomics Team's picture

Important Developments Today:

U.S. CPI inches up marginally, but core inflation falls.

Federal reserve nudges discount rate higher.

European manufacturing sector PMI points to growth.


U.S. CPI up marginally, but core inflation falls. The Consumer Price Index inched up by 0.2% in January (m/m), for 12-month inflation of 2.6%, down from the 2.8% pace recorded over the 12 months to December [see ]. At the same time, core prices, which exclude food and fuel, dropped 0.1% in January (m/m), logging the first decrease in this measure since December 1982. Continued weakness in prices provides the Federal Reserve room to keep the Fed Funds target rate at current record lows; however, the Fed raised the discount rate, which covers bank borrowing from the central bank itself.

Source: Department of Labor

While this is likely the first of anticipated moves to raise the level of policy interest rates, it is unlikely to have substantial direct effects on banking markets, as borrowing at the ‘Discount Window’ is normally the last of preferred options for replenishing commercial bank reserves. But the Fed’s move has analysts anticipating a sooner-than-expected increase in a broader array of rates. The Fed must also undertake a series of actions to back-out of markets in which earlier intervention was crucial to maintaining liquidity at the peak of the financial crisis. For example: commercial money markets, commercial paper markets; and a standing-back from additional purchases of GSA (Fannie and Freddie) as well as Treasury long-term securities—an effort that was successful in pushing mortgage rates to record lows.

European PMI flash estimates points to growth. The flash Purchasing Managers’ Index (PMI) for overall conditions in the Euro Zone published by Markit remained unchanged at 53.7 in February (an index value above 50 represents positive growth). But the PMI for factory output increased at the fastest pace in almost 30 months, rising to 54.1 in February from 52.4 in the previous month, suggesting continued growth in factory output for the region.

Among emerging markets:

In East Asia and the Pacific, customs-cleared trade data from the Thailand Commerce Ministry displayed a third monthly increase in Thai exports in January, up 30.8% (y/y).

In Central and Eastern Europe, unemployment in Bulgaria increased to 9.9% in January from 9.1% in December. The rate of unemployed persons in the labor force registered 6.5% this time last year, and with the economy expected to grow just 0.3% in 2010 unemployment may well rise into a 12-15% range.

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