Something borrowed, something blue

Last Wednesday Bernanke outlined future steps that the Federal Reserve would take when it was time to begin the journey back to a place where the financial relationship between the Fed and the financial industry looks somewhat like it used to. The chairman was extremely vague about when this might occur leading many to assume that he was trying to get a long ways out in front of this action so that markets would not be caught flat footed when the Fed started to unwind all of the special liquidity out there.

No body thought that “At some point” could be directly translated into “Next week.” The Fed’s increase of the discount rate from 0.5 percent to 0.75 percent is the first step in the plan that was clearly outlined. Great pains have been taken to be clear that this is not a signal of a change in the Federal Reserve’s policy stance but rather a return to business as usual when the economy and the financial institutions were ready.

This has lead to much speculation that the Fed is seeing strong signs of at least stability if not strength in economic data. Makes for a lout of noise and news and speculation on this Friday morning. Why the big rush?

One benefit of getting this thing out there in a hurry was that it helped to bury the lead on the other big story of the day.  Deflation. The core CPI fell 0.1 percent in January. Today would have been a very long news day for markets if that had been the big story of the day.

I don’t think that the discount rate move was prompted solely by the CPI report, but I do think that the Federal Reserve decided that they finally needed to be seen to be “doing something.” Watch to see what other unexpected news in the pipeline they are trying to beat with this move.