The U.S. Federal Reserve’s surprise move to hike the discount rate is a test by the central bank to see if the wholesale money market is back to normal, global strategist at Independent Strategy Ltd David Roche told CNBC on Friday.
“What the Fed is saying (is), let's find out if those markets can be made to function so that the banking system can function by borrowing from each other on a normal basis and pricing money on a normal basis,” Roche said.
"You don't want the world's financial markets to be running on underpriced capital, free liquidity, and on the other side of the street, from governments' massive fiscal stimulus. We have to find out if the baby can walk," he added.
Late Thursday, the U.S. Federal Reserve raised the interest rate it charges banks for emergency loans by 25 basis points to 0.75 percent from 0.5 percent, the first time the central bank has moved on rates since 2008.
While Fed officials have since spoken out to calm markets, saying the move does not change the outlook for monetary policy and that borrowing costs will still stay low, Roche maintained that the decision tantamounts to monetary tightening.
"Any form of monetary tightening is monetary tightening, and they've tightened. So you will hear from all sorts of people that it's expected, it doesn't matter," Roche said, and outlined how the move will impact the U.S. economy.
"Number one is, obviously, on the real economy. Does it mean that they're about to jack up interest rates? No, it doesn't. Number two is on financial assets. Does it mean that there's less free liquidity sloshing around, pushing up the price of commodities and the equities and so on and so forth? The answer is yes, it does. So it's significant," he said.