The Fed's Small Step

In a surprise move on Thursday, the Fed announced it was raising the discount rate from 0.50 percent to 0.75 percent. This is the rate the Fed offers banks that run short of cash and need to borrow money quickly.

It's important to note what this move is not: It's not a hike in the Fed Funds rate, which remains near zero. The Fed Funds rate has an effect on anyone who borrows money, but a hike in the discount rate is likely to have no effect at all on the wider lending picture. In fact, Ben Bernanke says yesterday's moves "do not signal any change in outlook for the economy or for monetary policy."

So why make the move at all? One reason may be to help bolster the value of the dollar. Rising interest rates make the value of today's dollar just a little bit stronger. After the Fed's announcement, the dollar spiked up against both the euro and the Japanese yen in yesterday afternoon's trading. Any further effects beyond that remain to be seen.