Fed's Next Step Is to Withdraw Liquidity: Meyer

The Federal Reserve's move to rise its discount rate does not signal an imminent rise in the fed funds rate and has nothing to do with Friday's inflation figure, Laurence Meyer, former Fed governor, told CNBC Friday. 

On Feb. 10, Fed Chairman Ben Bernanke said in his testimony to Congress that the discount rate was likely to be raised.

"We called (the decision) about two weeks earlier, before the chairman's testimony," Meyer said.

But others in the markets were taken by surprise, and stock markets in Asia and Europe fell in response.

Some market participants and analysts speculated that the central bank may have reacted to inflation figures, due to be released at 8:30 am New York time, but which Bernanke is said to receive beforehand.

The Bold Fed Prediction

"It really doesn't have anything to do with today's number," Meyer said. "The chairman got the number, he got it at 4 (pm on Thursday). You're not going to tell me he made the decision half an hour after he got the number yesterday."

The move on the discount rate does not mean that direct monetary tightening was on the way, as unemployment is still high and core inflation is still tame, according to Meyer.

The Fed is rather more likely to start withdrawing liquidity before touching the fed funds rate, he predicted.

"The next move will be to actively withdraw reserves, that will come late, that will come a meeting or two before the fed hikes funds rate," Meyer said.

"We don't think the Fed will raise the funds rate until into 2011," he added.