World markets in a tizzy over surprise Fed move

The Federal Reserve surprised the global markets by raising its discount rate in order to encourage banks to borrow from the private market for short-term credit instead of from the central bank. This is part of the American central bank's moves to withdraw the emergency support extended at the height of the financial crisis. This was the first hike in the rate Fed charges to banks for direct loans in more than three years.

The discount rate will be increased from 0.5% to 0.75%, moving the spread over the main federal funds rate to a more normal level. The discount rate is the rate at which commercial banks in the US borrow from the Fed.

Effective March 18 the typical maximum maturity for primary credit loans will be shortened to overnight. The Fed said that its move won't impact consumer or corporate borrowing costs. The more widely used fed funds rate, the overnight rate banks charge each other, is expected to remain at historic lows near zero for the foreseeable future.

The Fed made the announcement late on Thursday after the close of US markets.

Gold prices came under fresh pressure and crude oil prices softened after the Fed raised the discount rate by a quarter percentage point, sending the US dollar higher and hurting the overall investor demand for commodities.

The dollar index, which measures the US unit against a trade-weighted basket of six major currencies, jumped above 81.15. The dollar touched a nine-month high against the euro. The US currency headed for a sixth week of gains against the 16-nation euro. The Fed's move to raise discount rate stoked expectations that the US central bank was moving towards normalisation of monetary policy.

However, gains in the dollar were tempered after Fed policy makers curbed speculation that the central bank will raise interest rates this year. Federal Bank of St. Louis President James Bullard said that the markets’ view that rates will increase later this year is overblown.

Investors use gold as a hedge against financial turbulence and inflation. Gold generally has an inverse relationship with the dollar.

Crude oil futures were set for a 5% gain this week.

Asian shares mostly declined, with Hong Kong stocks falling the most. Markets in China, Taiwan and Vietnam remained closed for the Lunar New Year holidays. European stock markets were down marginally with banks and financial services stocks showing the most strain.