As predicted on Wednesday, the Fed increased a key interest rate for banks; however, the increase came much sooner than expected. Analysts had just recently announced that the hike in the discount rate was possible, but the sudden increase two days later actually a shock to the financial markets.
Increase in Discount Rate a Surprise
While banks knew the increase in the discount rate (the interest rate the Federal Reserve charges banks to borrow from the central bank for short periods of time) could occur at any time, they had no idea that it would happen so soon. According to published reports, the rate increased from 0.5 to 0.75 percent and was effective on Friday.
What this means for the banks is that now will have to pay more to borrow their short-term loans. However, experts insist that the increase in this interest rate will have not affect households or businesses in any way.
Core Inflation Drops First Time in Nearly 20 Years
In other economic news, the Labor Department announced on Friday that core inflation (or the core consumer price) dropped for the first time since 1982. This price, which dropped 0.1 percent in January, is used as an indicator of underlying inflationary pressures.
Unlike the consumer price index (CPI), core consumer prices look at hotel rooms, home ownership costs, new cars, airfare and clothing and exclude food and energy costs. So while the CPI rose 0.2 percent in January, the drop in the core consumer price means that inflation is still not a concern.
The good news is that none of the new reports will spark inflation or increase the interest rate on auto loans or mortgages. For now, experts insist that costs will remain low for consumers to ensure that the economy can recover at a reasonable pace.