In an unusual move, the Fed yesterday raised rates between official meetings.  The discount rate was raised to 0.75% from 0.5%, in what appears to be an effort to return lending facilities to more normalized levels. This move was anticipated to be discussed at the next meeting for possible future action, but with the inflation report coming in twice what was expected this morning, apparently they  felt the need to act.

The Fed indicated the move, along with other recent modifications to its credit programs, does not signal a change in its outlook for the economy or for monetary policy, and the more important fed funds rate remains in its range of 0% to 0.25%.  The Fed usually changes the discount rate at the same time it does the fed funds rate, but after the unprecedented steps taken to combat the financial crisis, the Fed appears eager to start bringing rates back to more traditional levels, and Thursday’s move was a start.

What does this mean for interest rates?  Right now the mortgage market is still off negative on yesterday’s inflation news.  Action by the Fed historically calms fixed rate investors nerves about inflation eating up the value of their mortgage investment.