(Melchizedek Communique, MC022110) On February 18, 2010, after U.S. markets had closed, the "Federal" Reserve suddenly hiked an emergency bank-lending rate, triggering speculation on monetary tightening. P. Parameswaran of AFP says the discount rate was raised on Friday, February 19th, but if memory serves the increase happened on Thursday, late in the day. [1]

Why the sudden, surprising rate hike? On Friday, February 19th, versions of a "cover story" began to appear. Ann Saphir of Reuters confirms the "Fed" announced "on Thursday that it was increasing the rate it charges banks for emergency loans to 0.75 percent from 0.50 percent..." [2] Perhaps the announcement came on Thursday and the actual rate hike was on Friday. A difference between the Federal Funds rate and the discount rate is highlighted. Bankers had a sweet deal going for them with the discount rate unusually lower than the Federal Funds rate. That meant banks could borrow from the "Fed" at the discount rate and then invest the money at the higher Federal Funds rate. In normal times, the discount rate would be higher than the Federal Funds rate. "When the Fed reduced the discount rate in September 2007 and left the Federal Funds rate unchanged, it was deliberately increasing the likelihood that banks would shift their borrowing to the Fed and trigger reserve and monetary expansion. By reducing the discount rate, the Fed intentionally abandoned the traditional one percent differential in order to deal with the crisis. But this reduction was never intended to be permanent." [3]

Reportedly, the "Federal" Reserve itself claims the sudden rate hike is merely meant to normalize the spread between the funds rate and the discount rate. [4]

But unexplained is the sudden, surprise nature of the rate hike, announced late Thursday and implemented on Friday. What was the rush? Why not wait until the markets closed on Friday and give investors the weekend to digest the news? Melchizedek Communique has speculated the surprise rate hike is linked to China's sudden reduction of U.S. Treasury holdings. Wrapped up in the China withdrawal is weapons sold to Taiwan and the Dalai Lama welcomed at the White House. [5]

David Rosenberg, chief economist and strategist, Gluskin Sheff, is quoted in Canada's Globe & Mail alluding to "what has happened in China this year" in connection with the surprise rate hike. [6]

Ben Bernanke, chieftain of the "Federal" Reserve tribe, is scheduled to appear before a House committee this Wednesday, Feb. 24, and before a Senate panel on Thursday, Feb. 25. Bernanke's "testimony will be closly scrutinized by jittery markets." [1]

------- Notes -------
[1] "Fed chief to throw light on policy after rate hike", by P. Parameswaran. AFP, Feb. 20, 2010
[2] "Rate hike furor shows delicate task ahead for Fed", by Ann Saphir. Reuters, Feb. 19, 2010
[3] "What The Discount Rate Hike Is Really About", by Bob McTeer. Forbes blog, Feb. 19, 2010
[4] "What does the Fed's discount rate increase mean?", by Stefan Karlsson. Stefan Karlsson's Blog at the Christian Science Monitor, Feb. 19, 2010
[5] "Shopaholics Flee Washington, DC", Melchizedek Communique, Feb. 20, 2010
http://www.shout.net/~bigred/mc022010.html
[6] "Rate hike hysteria", by David Berman. Globe & Mail, Feb. 19, 2010
http://www.theglobeandmail.com/blogs/markets/rate-hike-hysteria/article1474246/