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Business Title: Fed Discount-Rate Increase Signals Recovery on Track Feb. 19 (Bloomberg) -- The Federal Reserve’s decision to raise its discount rate shows that the global recovery is on track and other central banks can afford to keep withdrawing emergency measures, former policy makers and economists said. “It’s another minor step in a long march towards normalization,” said former Bank of England official Charles Goodhart in a telephone interview. “The Fed has already moved some way to reducing credit easing, as has the ECB, as has the Bank of England.” The Fed yesterday raised the rate charged to banks for direct loans by a quarter-point to 0.75 percent, the first increase since June 2006. The Fed said it was a “normalization” of lending that wouldn’t affect monetary policy, and the main federal funds rate would remain low for an “extended period.” The move came as policy makers debate how to withdraw measures designed to haul their economies out of the worst global recession since World War II. While the European Central Bank has already ended some of its emergency liquidity tools, the euro-region economy almost ground to a halt in the fourth quarter and its task is complicated by Greece’s fiscal crisis. The Bank of England is concerned the U.K. economy may lapse back into a recession and expects inflation to undershoot its target over the next two years. The Bank of Japan says it’s still tackling the “critical challenge” of deflation, while unemployment in the U.S. and euro region is around 10 percent. The Fed’s decision nevertheless increased speculation that the U.S. recovery will be strong enough to allow it to tighten policy in the fourth quarter. The dollar strengthened 0.8 percent against the euro since yesterday’s announcement, trading at $1.3518 at 1 p.m. in London. Early Signs? “What the Fed did encourages me because it just may be that the Fed has seen the early signs of recovery,” said Meghnad Desai, Professor Emeritus of Economics at the London School of Economics, in an interview with Bloomberg Television. “European data is slightly misleading, I think there’s more recovery around than we see in the published data.” Bruno Lafont, chief executive officer of Lafarge SA, the world’s biggest cement maker, said the move may be good news. “This increase shows some confidence in the economic pickup,” he told reporters in Paris today. The ECB has already halted lending unlimited funds for 12 months and may stop other measures at its next meeting on March 4. While President Jean-Claude Trichet has signaled that its benchmark rate is “appropriate” for now, a faster global recovery may prompt him to tighten sooner, says Juergen von Hagen, economics professor at the University of Bonn. “The ECB has more reason than the Fed to think about a tightening of its policy in summer,” he said. “Liquidity in the euro region is abundant and the central bank is well-advised to focus on this to avoid inflationary risks. Inflation is not a problem right now, but if you wait for too long you may have to increase rates in a way which will hurt economic growth.” Options Open? Economists don’t expect the ECB to start raising its benchmark rate from a record low of 1 percent until the fourth quarter, according to a Bloomberg News survey last month. The Bank of England is leaving the option open to resume bond-buying if needed after pausing its 200-billion pound (308 billion) program this month. The U.K. economy returned to growth in the fourth quarter of last year, expanding 0.1 percent from the previous three months. Policy maker Kate Barker said in an interview published by the Belfast-based Newsletter today that the economic recovery will be “quite hesitant.” The Fed’s move may also prove a boon to an export-led recovery by bolstering the dollar, at the expense of the euro, some economists said. The single currency has lost 6 percent this year on concerns over swelling budget deficits and the impact of Greece’s debt crisis on the stability of the euro region. “If on top of that we see the market also becoming more confident on the U.S. recovery and the Fed moving towards hiking the Fed funds rate eventually, that could push the euro significantly lower,” said Marco Annunziata, chief economist at UniCredit Group in London.
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