The FedÕ Non-Tightening Tightening

Let’s see. The Fed hiked a rate even though it wasn’t the policy rate. The Fed shortened a term even though it wasn’t the “normal” term. The Fed announced it as a surprise even though they have been saying they want to be transparent and prepare markets for changes in advance. And the Fed speakers then spent effort trying to explain why a discount rate hike at an inter-meeting move with a reduction in term is not a tightening action. By using this surprise the Fed has introduced some confusion into markets. It doesn’t mean rates are going up tomorrow or next month or by mid-summer. But it does mean that an additional uncertainty has been introduced into market pricing. Interest rates will now reflect this uncertainty. The dollar strengthened immediately as one would expect it to do. Currency exchange rates are now the first thing to react to changes in policy. And this was a change in policy event though the Fed says it is not so.