Reeling It In

Bernanke and the Fed started talking about raising the discount rate. Via Bloomberg:

"Bernanke yesterday described how the Fed might use tools such as interest it pays on banks’ deposits to tighten credit “at some point.” In congressional testimony, he said a potential increase in the Fed’s discount rate would be part of the “normalization” of lending “before long” and wouldn’t signal a change in the outlook for monetary policy"

The markets didn't really like the idea of rate hikes. Stocks fell intraday and treasuries fell, causing yields to increase. Personally knowing the Fed has an exit strategy is actually reassuring to me, I'm not sure why it adversely affected the broad equity indexes. Mark Thoma provides some excellent analysis here in a video . He makes one assertion in the model that's no necessarily correct but it only matters in extreme circumstances. Banks don't always buy from the fed at the line "id," they didn't in fact at the beginning of the crisis because banks were worried about showing weakness. So there are circumstances where banks will pay a higher rate than the discount rate.