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Friday, February 19, 2010

Dollar Up so Market Down: Futures down and Discount Rate is to Blame

Fed Raises Discount Rate by Quarter-Point to 0.75%
Feb. 18 (Bloomberg) -- The Federal Reserve Board raised the discount rate charged to banks for direct loans by a quarter point to 0.75 percent and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs.
“These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the central bank said today in a statement. “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”
The dollar jumped as the Fed took another step in a gradual retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The Fed has provided hundreds of billions of dollars in backstop credit to banks, bond dealers, commercial paper borrowers and troubled financial institutions such as American International Group Inc.

*Federal Reserve raises the Discount Rate (emergency loans that fed makes to banks, usually overnight loans but the fed had extended it out to 30 days and now its back to overnight), unexpectedly to us lowly traders, but apparently everyone who needed to know (PIMCO, GS, JPM et al) knew before hand and traded accordingly. Check out the precipitous unloading of SPYdrs below.

It is not what you do, it is how you do it, and this sort of thing is just yet another reason why The Fed must be audited. The timing on this is too damn suspicious - never mind that someone sold a metric ton of SPY right in front of the announcement - literally by seconds, 2 million shares were unloaded.

Betcha you can't find a cop.

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