Commercial Real Estate Finance

After the New York close, the FOMC announced a hike in the Discount Rate (0.50% t 0.75%).  Please note: this is NOT the Overnight Rate (manipulated via Open Market Operations).  There is a significant difference and an inter-meeting hike, at this point, of the Overnight Rate would have been cause for a bit of panic.  The Overnight Rate effects all banks, right away.  The Discount Rate only effects banks that borrow at the Discount Window; i.e. tonight’s news immediately and directly effects only a tiny fraction of the financial world.

This does not mean, however, that tonight’s hike is without both real significance and real impact.  Don’t let the talking heads/cheerleaders on CNBC fool you.   This is a big deal and you should pay attention.

Why?  It speaks to pacing.  As I have written about before on numerous occasions, the tightening cycle is both necessary and immanent.  And, as the talking heads will tell you “everyone knew” the next move by the fed would be a hike of the Discount Rate.  The significance is the timing of the announcement.  I needn’t tell you: life is all about timing.

The next FOMC meeting is on March 16th.  Why couldn’t they wait until then to announce this?  I cannot imagine the first choice for Bernanke et. al. is to surprise the markets.  [By the way, if their intent was to surprise the markets, then the signal is even stronger.]  They must have felt forced into making this decision earlier than planned.  I’ll say that again: “earlier than planned“.  It is essentially the Fed admitting that they are behind the curve (literally) and they are being ‘dragged’ by the market into tightening at a quicker pace than expected.

So, if the people at the Fed are behind the curve on the discount rate, they they are likely behind the curve on the rest of their ‘normalization’ schedule.  This is, of course, exactly where they always are: behind the curve.  They are, at the end of the day, civil servants/bureaucrats and being ahead of the curve is anathema to them.  They have a duel mandate and are not rewarded for risking action based on predicted future outcome.  They react once the horse has left the barn well in the dust.

Inter meeting announcements are almost always reserved for ‘urgent’ situations, and this time is no different.  This announcement couldn’t wait 26 days for a reason, and that is what’s matters.

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