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Banking

Monetary policy: Cheap money is here to stay – for now

Price action reflects fragile nature of recovery; Fed reiterates fed funds to stay low for “extended period”

Bernanke

Bernanke told the House Financial Services Committee a weak job market and tame inflation warrant low interest rates for "an extended period", dampening speculation a policy tightening might be nearing

It’s the strongest signal yet from the Federal Reserve that it is beginning to withdraw the life support system that has helped keep the banks’ blood circulating over the past two years. On February 18, the Fed raised the rate it charges to banks for direct loans by 25 basis points to 0.75%, effective immediately, the first such up-tick in three-and-a-half years. It was an unexpected turn by the Fed as far as the markets were concerned, with fed fund futures contracts repricing earlier rate hikes, equity markets selling off, and the US dollar rallying.

But was it a red herring for the markets? The Fed thought so, and it said so. In the days that followed various Fed officials were at pains to point out that the discount rate rise was merely part of a process towards "normalization" of lending that would have no impact on monetary policy, while at the same time reiterating that the benchmark federal funds rate would stay low for an "extended period".

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