Stephen Foley: Monetary tightening not on the cards

US Outlook: Chairman Ben Bernanke said it in his Congressional testimony last week, and in the statement accompanying the formal announcement on Thursday night: the Federal Reserve's decision to raise the discount rate by a quarter-point to 0.75 per cent does not signal a tightening of monetary policy.

The markets didn't listen, naturally, at least initially as stock sold off and bond yields rose. By the end of yesterday, the message seemed to be getting through.

The discount rate is the interest rate charged at the Fed's famous discount window, where banks go to borrow emergency cash. Or, theoretically go, because actually most are too scared that word of their needs will leak out, so really troubled institutions didn't use it at all.

The most important aspect of the discount rate, over the course of these extraordinary two years, is that it has been the rate on which a variety of other Fed programmes have been priced – programmes such as the term auction facility and primary dealer credit facility, which were meant to provide stigma-free access to Fed loans in a financial panic. These facilities have withered away as credit conditions return to normal. From a peak of almost $600bn at the end of 2008, less than one-tenth of that is outstanding, and the facilities have been withdrawn or are being wound down.

Raising the discount rate is meant to squeeze the last $50bn or so out of the system, more for administrative ease than anything else. It is the full stop to an era we knew had passed, not a harbinger of a new period of monetary tightening.

Read Mr Bernanke's lips. Real monetary tightening will wait until the economic recovery is on a sounder footing. As it should.