Fed raised the discount rate. Will it affect interest rate?

[ahvyee]

Hi Dennis,

Yesterday, the Fed raised the discount rate by 25 basis points to 0.75 percent. Actually, what is 'dicount rate' means?

Will it affect the overall interest rate in Singapore (like housing loan, FD)?

Just would like to know..

Thank you in advance

[Dennis Ng]

Hi Dennis,

Yesterday, the Fed raised the discount rate by 25 basis points to 0.75 percent. Actually, what is 'dicount rate' means?

Will it affect the overall interest rate in Singapore (like housing loan, FD)?

Just would like to know..

Thank you in advance

The discount rate is an interest rate a central bank charges depository institutions that borrow reserves from it.

The Fed lifted the discount rate charged to banks for direct loans -- from 0.5 percent to 0.75 percent -- for the first time in more than three years, signaling a retreat from its unprecedented actions to halt the deepest financial crisis since the Depression. Singapore said its economy will expand faster than expected this year, adding to evidence that the recovery has prompted policymakers to withdraw stimulus measures.

“The U.S. has started moving toward the exit of stimulus measures,” said Kenichi Hirano, general manager and strategist at Tokyo-based Tachibana Securities Co. “Though it’s necessary, the move is making investors jittery and is a short-term negative for the market.”


My comments below:

This might not lead to increase in rates in Singapore, since US rates and S'pore rates are not 100% co-related.

Interest rates in Singapore is also affected mainly by Liquidity in the S'pore banking system.....S'pore is still flushed with money, so I expect interest rates to remain low for a while.

Actually, even 0.75% is very low. In year 2003, when rates was at historical low then, US Fed rate was 1%...

So this upping of discount rate is actually good news, as it might signal Fed has confidence in the U.S. economic recovery.....as you can see, US Dollar strengthened after the announcement.

[ahvyee]

thank you Dennis for the clear explanation

[Dennis Ng]

thank you Dennis for the clear explanation

you're welcome.

Also like to clarify that discount rate is the interest rate Fed charge on emergency lending to financial institutions, and NOT the Fed rate, which is the rate banks charged one another for inter-bank borrowing. The S'pore equivalent would be SIBOR (Singapore Inter-bank Offered Rate).