Federal Reserve Suddenly Hikes Key Interest Rate

02.19.10 | FL News Team

The Federal Reserve suddenly hiked a key interest rate after the stock markets closed on Thursday. The Fed increased the discount rate by one-quarter of a point, from one-half-percent to three-quarters of one-percent. The discount rate is the interest rate the Fed charges banks for short-term loans, which are mostly overnight loans. Although the rate hike has no direct effect on consumers, it raises the cost of doing business for financial institutions -- leading to the possibility of higher banking fees charged consumers in the long run.

 In a statement posted on its website, the Fed said the higher rate will encourage banks to, quote, "rely on private funding markets for short-term credit and to use the Federal Reserve only as a backup source of funds." In the wake of the announcement, stock futures declined in the Dow Industrials, the Nasdaq and the S&P 500 indexes. For the Dow, futures fell 65 points in the span of half an hour following the announcement. Some analysts said the move was not a surprise, since the Fed warned earlier it would begin to raise rates and begin to unwind its heavy investments that bailed out the economy last year.