Tightening? Not a Tightening?

Last week, the Fed raised the discount rate from 0.50 percent to 0.75 percent and also shortened the term of loans allowed through the discount window from 28 days to overnight.

But was this a tightening in monetary policy? Practically speaking, the answer is "no."

Today, less than $15 billion in loans outstanding will be affected by this move, compared to the $1.2 trillion increase in the Fed's overall balance sheet during this crisis. The phrase "extremely nominal" comes to mind.

More importantly, Ben Bernanke stated just two weeks ago that this move was on the way and made it clear the action should not "lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy."

Consider it a "normalization" of relative rates.

But doesn't any move toward "normal" from today's decidedly "un-normal" situation indicate a tightening of some kind? If this rate move only affects the minutest number of borrowers, doesn't it still bring us one step closer to the move that affects the rest of us?

Possibly, although I believe that move is still in our distant future.

In fact, the day after the discount rate was normalized, the consumer price index for January revealed its first monthly decline since 1982 for the so-called core measure that strips away food and energy prices.

Inflation worriers are looking forward with the strongest of binoculars.

Gaming the Data?

There is speculation from those who watch such data that the Chinese continue to be net buyers of U.S. Treasuries through UK and other investment vehicles. These purchases show up through direct bidding and are not allocated to China in the traditional TIC data (so it looks like China is selling).

I mention this fact, not to argue one way or the other, but as a reminder of exactly how frail most data is. The same can be said of many economic statistics including the CPI data mentioned above.

At the end of the day, data should be used in conjunction with common sense and even anecdotal evidence prior to forming opinions.

In the case of China, does anyone really believe they will solidly revalue their currency by selling dollars if it is a given this will derail their economy and likely lead to a revolution?

My view is that it does not matter what China does with their Treasuries because, at the end of the day, they will not commit such an egregious error as a drastic revaluation.

Key Developments

The New York Empire State Manufacturing Index leapt to 24.9, defying all expectations even as all component indices fell. The headline index is obviously not an amalgamation of the component indices, but is a stand-alone component. Given the inconsistencies, one wonders how the respondents to the headline survey could have such an improved outlook for general business conditions without a corresponding outlook on new orders, shipments or delivery times.

The Fed raised the discount rate from 0.50 percent to 0.75 percent as Chairman Ben Bernanke attempted to make it clear the Fed does not view this move as a tightening of monetary policy. Instead, the Fed is calling this a normalization of relative rates. Producer prices rose more than expected even as consumer prices undershot the market's predictions. Considerable slack in the economy is keeping core price pressures rather low, while food and energy prices remain volatile.

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