Analysts Expect Fed to Hike Key Interest Rate Soon

Peter Barnes
Fox Business
2/15/2010

The Federal Reserve could hike a key interest rate as early as next month, some financial analysts predict — but it is not the one that affects home equity lines, auto loans, business credit lines and some credit cards.

With the economic recovery on uncertain footing and unemployment still high, rates for these kinds of financial products are expected to remain low at least through the end of the year.

Analysts are eyeing the so-called “discount rate”— the interest rate the Fed charges banks that borrow from the central bank itself for short periods at a Fed lending operation known as the “discount window.”

Banks do this “in times of need,” the Fed says on its website – generally when they face a short-term cash crunch and can’t borrow money from another bank or other source at a reasonable rate, analysts say.

The discount rate is distinct from another key rate the Fed targets, the benchmark federal funds rate, which is the interest rate banks charge each other for overnight borrowings through the Fed.

Rates on home equity lines of credit, auto loans and business credit lines are pegged to the fed funds rate, not the discount rate; so are rates on some credit cards.

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