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Fed hikes the refi rate: "If you know what I mean, you probably misunderstood me"

We, relaxed folks from the Eastern hemisphere, woke up this morning speechless. "What? Fed? Hikes?" Stunning move! Really?

Let's take a breather and ask ourselves: "Why jerking pathetic refi rate instead of the discount rate?" Well, the refi rate is, unlike the Fed funds rate, is a purely fiscal mechanism - it targets the monetary market instead of a broader economy". We mostly focused on health of the US economy lately: yes, those mixed signals - edging up GDP (for account of raising inventories) and new homes standing against escalated unemployment, slumping consumer demand and bankrupt State budgets. What what Fed really meant by working on the "Tzar's right hand", the refi rate, instead of the Tzar itself. Apparently, increasing the gap between the two rates is no good for the economy: it ostensibly leaves the credit cheap while increasing the cost of lending money. Are the US banks really fit enough to deal with reduction of their margins?

The answer is "Probably, not", but the real enemy which was targeted by the Fed yesterday is inflation. After the recently failed UST30 auction (read ), it became apparent for Fed, that from now it will pay through the nose to keep the long treasuries sustainable. Hence, printing induced inflation. Not that nudging up a refi rate by 25 bp would solve the problem, but the trick is to show the market the partly forgotten weaponry at Fed's disposal - on one hand, and its envisioning of this grim situation - on the other.

Disclosure: Fed refinancing rate