Instant View: Fed raises discount rate to 0.75 percent

NEW YORK (Reuters) - The Federal Reserve said on Thursday it was raising the interest rate it charges banks for emergency loans, citing improvement in financial market conditions.

KEY POINTS: * The Fed said the discount rate would be increased to 0.75 percent from 0.50 percent, effective Friday. * "Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities," the Fed said in a statement. * The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, said the Fed.

COMMENTS:

TOM SOWANICK, CHIEF INVESTMENT OFFICER, THE OMNIVEST GROUP, PRINCETON, NEW JERSEY:

"This should not be market moving news. The release of Bernanke's testimony to Congress last week told us that they would first change the discount rate. Second is they would sell assets and lastly, they would offer banks, CDs and finally they would start to raise the federal funds rate. This is not the time to panic it is the time to feel relieved."

NICK KALIVAS, VICE PRESIDENT, FINANCIAL RESEARCH, SENIOR EQUITY INDEX ANALYST, MF GLOBAL, CHICAGO:

"The issue for the market is the confusion and uncertainty it brings because they are going to be withdrawing this emergency liquidity via measures that are not related to the Fed funds rate, and we're used to a Fed funds rate kind of world.

"The move in the Fed funds rate is really going to be the more interesting move when it happens, and I think that move is contingent on the labor market growing.

"(The Fed) is basically worried about this large liquidity overhang, to some degree they think that all this excess liquidity isn't really doing the economy any good."

SAMARJIT SHANKAR, MANAGING DIRECTOR GLOBAL STRATEGY, BNY MELLON, BOSTON:

"This move removes the 'extra' from the extraordinary accommodative monetary policy that has been in place in the U.S. The knee jerk reaction in the dollar is just that, a quick reaction. Once markets digest the news it will see that it is a minor increase and I wouldn't be surprised to see it giving back some of its initial gains."

RICHARD SPARKS, SENIOR EQUITIES ANALYST, SCHAEFFER'S INVESTMENT RESEARCH, CINCINNATI, OHIO:

"The timing is most surprising. The last day of options expirations is tomorrow (Friday) and this is going to create a lot of angst and ruin a pretty good week we were having.

"There were a lot of other measures outside rates and I thought (the Fed) would work in those areas rather than go directly to rates.

"There probably will be a down day tomorrow (in stocks) given the good three sessions so far this week and given the news will be seen as negative. Investors will be compelled to limit losses in some positions. But once the market has a chance to digest the news this may not be a big drop."

BRET BARKER, PORTFOLIO MANAGER, METROPOLITAN WEST ASSET MANAGEMENT, LOS ANGELES:

"Bernanke is keeping his word -- he telegraphed this in his speech last week. I take him at his word...this is not a sign of tightening. The discount rate is the rate commercial banks lend to each other and the discount rate used to be 100 basis points over federal funds but they took it down to 25 basis points. I think Bernanke just wants things to work back to some kind of normalcy."

TOM FITZPATRICK, CHIEF CITIFX TECHNICAL STRATEGIST, CITIGROUP, NEW YORK:

"This had been signaled. They indicated it would happen. It's part of the normalization process, and there's been no indication of a change in policy. They've reiterated that the fed funds rate will stay low for some time. So they probably couldn't have telegraphed this more. You're seeing a knee-jerk reaction in the market given that they announced late in the afternoon. I don't think it has anything to do with the dollar, to be honest, but is simply tied to their ending an emergency measure that is no longer deemed necessary."

ADDISON ARMSTRONG, SENIOR DIRECTOR, MARKET RESEARCH, TRADITION ENERGY, STAMFORD, CONNECTICUT:

"Crude futures are dropping like a stone after the Fed raised its discount rate. The crude oil market is following the S&P 500 Index, which fell on the news. This Fed move is not directly related to commodities as it will affect short-term borrowing. But it will strengthen the dollar and in the process affect crude futures downwards."

LAWRENCE GLAZER, MANAGING PARTNER, MAYFLOWER ADVISORS, BOSTON:

"The Fed's original measures that they took were extraordinary, so they are trying to gradually unwind that emergency status. These are logical measures the Fed is taking. The Fed will likely proceed gingerly to ensure that the market can absorb these changes.

"We would expect to see a greater impact on short-term Treasury yields as a result of this unwinding and we are seeing the beginning of that now.

"There is a lot of money that is anticipating a rise in short term rates. Some investors will welcome this, in a yield hungry environment. For retirees this could be welcome news. For the mortgage market we will have to see."

CHRIS RUPKEY, CHIEF FINANCIAL ECONOMIST, BANK OF TOKYO-MITSUBISHI UFJ, NEW YORK:

"The Fed can talk all day about how the discount rate hike is technical and not a policy move, but the market sees it as a shot across the bow. This may be one small step back toward the normalization of Fed operations, but in the grand scheme of things, the Fed is moving back to doing business as normal and business as normal is not targeting an exceptionally low Fed funds rate of zero to 0.25 percent.

"Today they raised the discount rate, and not tomorrow or the next day, but soon, they will be lifting the Fed funds rate target as well as the economy is starting to regain momentum and the fears of a W-shaped recovery are increasingly falling to the wayside."

KIM RUPERT, MANAGING DIRECTOR, GLOBAL FIXED INCOME ANALYSIS, ACTION ECONOMICS, SAN FRANCISCO:

"They have talked about this for a couple of weeks now. It is the start of their exit strategy, almost. Bernanke talked about it last week and it was mentioned again in the FOMC minutes. So they are just moving to normalize policy."

SHAUN OSBORNE, SENIOR CURRENCY STRATEGIST, TD SECURITIES, TORONTO:

"It's a little odd that they did it today, and the timing is going to catch the market out a bit. But I think it's going to be very easy to over-interpret this. They said this is in line with normalization in various other measures, so they're specifying this doesn't signal any imminent change in the fed funds rate. It probably will be a bit of a blow for risk assets. We saw the dollar pop up a bit. But I think it supports the underlying trend of risk aversion, pressure on equities. EUR/USD back below $1.36. Rather than call it a significant development, I'd say it shows the Fed is gradually moving toward normalization."

NICK BENNENBROEK, CHIEF CURRENCY STRATEGIST, WELLS FARGO, NEW YORK:

"The dollar's strength after the Fed announcement is understandable. But Bernanke did mention this in his testimony so it's not a complete surprise. So he kind of signaled it a bit. What is a surprise though is the timing, coming at this time when most traders have left and in so short a time after he made the remarks. Most traders expected the Fed move a few weeks but not this soon. Overall this suggests conditions are easing a bit and the recovery is on track."

AMELIA BOURDEAU, CURRENCY STRATEGIST, UBS AG, STAMFORD, CONNECTICUT:

"We knew a hike on the discount window was coming because Ben Bernanke had mentioned it in his last testimony, but we didn't expect it so soon. The market is taking this as a tightening and that's why we are seeing the dollar straightening from here. Overall it is supportive to the currency because this is the beginning of the normalization process in monetary policy."

MICHAEL POND, TREASURY AND INFLATION-LINKED STRATEGIST, BARCLAYS CAPITAL, NEW YORK:

"The Fed is billing this not as a monetary policy change to its main target rate but the market obviously will take this as a bearish sign that the Fed going to start to tighten.

"In addition, they shortened the discount window term from 30 days to overnight -- that's just one more way they're slowly but surely removing policy accommodation. The Fed put many of these policies in place during crisis times. There are still uncertainties as to the economic recovery but we're clearly no longer in crisis times."

MARKET REACTION: STOCKS: U.S. stock index futures fall after Fed raises discount rate. BONDS: U.S. Treasury debt prices extend losses. DOLLAR: U.S. dollar rises versus yen, euro. RATES: U.S. short-term interest rate futures fall, while fed fund futures see higher chance of rate hike this year.