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Sunday 21st of February 2010
February 19, 2010    

Fed discount rate rise triggers sterling losses

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by Kay Murchie
Fed discount rate rise triggers sterling losses

The US Federal Reserve stunned markets by raising its discount rate (the interest rate it charges banks for emergency loans) by 25bps to 0.75%.

The news sent the pound down to its lowest level against the US dollar in nine months, while Asian equity markets reacted cautiously as they digested the news.

Furthermore, the euro also plummeted to a nine-month low.

The Fed said its decision came “in light of continued improvement in financial market conditions” but said the changes “do not signal any change in the outlook for the economy or for monetary policy”.

However, many saw it as withdrawing from stimulus measures, which many Governments introduced to bring their economies out of recession.

Earlier this week, the Fed said economic growth will be between 2.8% and 3.5% in 2010 - better than its previous forecast of 2.5% to 3.5%.

However, the Fed has warned that despite strong growth for this year, unemployment will remain high.

Last month, official figures revealed that the US economy grew 5.7% in the final three months of 2009 - the fastest pace in six years and higher than analysts expectations.

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