What the Federal Reserve Has Been Up To (In Case You Didn't Know)

Late Thursday, last week, the Fed popped a surprise on the financial markets by raising the discount rate charged to borrowing member banks from 0.5% to 0.75%. The Fed insisted this increase didn't mean much of anything, and tried to imply that it shouldn't have come as a surprise. Most market participants were surprised--mostly by the timing, but in the financial markets, timing can be everything.

Now, maybe you're wondering what else those kids at the Fed have been up to. Here's a list of other recent steps taken by the Fed to end accommodative measures it instituted during the credit crunch:

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility: closed as of Feb. 1, 2010.

Commercial Paper Funding Facility: closed as of Feb. 1, 2010.

Primary Dealer Credit Facility: closed as of Feb. 1, 2010.

Term Securities Lending Facility: closed as of Feb. 1, 2010.

Temporary Liquidity Swap Arrangements with Foreign Central Banks: closed as of Feb. 1, 2010.

Term Auction Facility: last auction to be conducted on March 8, 2010.

Term Asset-Backed Securities Loan Facility: to expire on March 31, 2010 for most types of acceptable collateral and on June 30, 2010 for new issues.

Agency Mortgage-Backed Securities Purchase Program: to stop purchasing on March 31, 2010.

As you can see, the Fed has been busy, busy, busy winding down emergency measures that greatly added to the financial markets' liquidity during the last year and a half. Other than the mortgage-backed securities buying program listed last, these facilities weren't getting a lot of usage recently. Nevertheless, shutting them down means the financial markets apparently are normalizing, and that would imply interest rates are headed higher than the 0 to 0.25% that remains the Fed's target fed funds rate. The Fed was administering a lot of talk therapy on Friday to reassure the markets that it did not intend the discount rate increase to raise interest rates marketwide. Still, when you look at everything the Fed has done recently to reduce the flow of federal liquidity into the financial markets, it's hard to conclude anything except that interest rates are going up (because normally, interest rates are higher than 0 to 0.25%), and perhaps sooner and faster than many people thought.