Fed Raises Discount Rate, Futures Indices Sharply Decline

Thanks to strong macroeconomic data, stock prices on Wall Street rose for the third consecutive day on Thursday, but futures indices are signaling a price drop today as the Fed unexpectedly raised the discount rate.

The Dow Jones index strengthened by 83 points, or 0.81 percent, to 10,392 points, while the S&P 500 rose by 0.66 percent to 1,106 points. The Nasdaq index gained 0.69 percent, reaching 2,241 points. The rise in stock prices is attributed to a report from the Fed’s Philadelphia branch on the growth of industrial activity in that region in January, as well as data from the Conference Board indicating a continued increase in leading economic indicators for the tenth consecutive month, confirming theories of a stable recovery of the U.S. economy. These data pushed bad news from the labor market into the background. It was reported yesterday that the number of new unemployment claims rose by 31,000 last week to 473,000, while analysts had expected a decline.

"Macroeconomic data is mixed. There is a kind of war between good and bad indicators, with the good ones having a slight advantage due to moderate recovery. However, the economy is in the early stages of recovery, so it is clear that there will still be concerning data," explains Jim Awad, director of Zephyr Management. However, after the closing of Wall Street, a ‘cold shower’ followed. The U.S. central bank unexpectedly raised the discount rate, the interest charged to banks for emergency loans, by 0.25 percentage points to 0.75 percent.

This Fed move does not directly affect interest rates on loans for millions of Americans, but it is considered part of a strategy to withdraw extraordinary measures that the Fed implemented more than a year ago to improve the liquidity of the financial system and reduce interest rates. Although the Fed indicated that this, the first interest rate increase since December 2008, should not be interpreted as a signal that interest rates on loans to companies and citizens will soon rise, and reiterated that key rates on Fed funds will remain unchanged at record low levels of 0 to 0.25 percent for some time, investors are unsettled.

U.S. futures indices sharply declined following the Fed’s move. The Dow Jones, Nasdaq, and S&P futures indices were down more than 1 percent this morning, indicating a drop in stock prices at the start of today’s trading on Wall Street. "On Friday, stock prices are likely to fall, as the Fed’s move will be perceived negatively by the market. However, as investors have time to think about it, the price drop may not be significant," says Richard Sparks, an analyst at Schaeffer’s Investment Research. European stock markets saw price increases yesterday. The London FTSE index rose by 0.92 percent to 5,325 points, while the Frankfurt DAX increased by 0.57 percent to 5,680 points. The Paris CAC rose by 0.61 percent to 3,747 points.  (H)