Now for the rate rises in the United States, as the Federal Reserve signals the great easing is over. They won’t come immediately, not even at the Fed’s March 16 meeting. But the central bank made it clear yesterday, while still insisting the economy needs official rates kept at record lows for “an extended period”.

In the market’s mind (such as it is), rate rises are now front and centre, so standby for endless speculation.

The move — which took markets, banks and regulators by surprise — came out of nowhere just after US sharemarkets had finished trading at 8am today Sydney time.

The Fed announcement was made with only the foreign exchange and money market in Australia open; Japan was an hour away. The Australian dollar dropped about a cent but then steadied, while the US currency rose under $US1.35 to the euro, which had already been under new pressure from more worries about Greece and its debts.

The Fed said it would raise the discount rate at which commercial banks borrow from the central bank as part of moves to withdraw emergency support to the financial system. Besides the rate cuts to the current 0% to 0.25% on the more important federal funds rate (which is not being moved — yet), the Fed has pumped in trillions of dollars in support for banks and other financial groups, mortgages, companies large and small and indeed the US government’s deficit.

The discount rate will rise from 0.5% to %0.75 tonight our time, moving the difference from the Federal Funds rate to a more normal level. The length of loans will also be shortened to a maximum of overnight from the emergency up to 90 days. The Fed made it clear it wants banks to start funding themselves from the markets and not the Fed’s cheap money;  a sort of weaning for the financial cautious and crippled.

The surprise nature of the announcement came as there was a sell-off in US treasuries earlier in the day that saw yields rise to about 3.8% and a touch higher for key 10-year bond. That attracted attention and speculation of an unusually informed market, with the respected Financial Times blog, FT Alphaville, asking: “Did the discount news leak?” (There’s a good graph here.)

The discount rate cut is important, but it won’t change market rates. They will be impacted gradually by rises in the Federal Funds rate. The Fed moved not because of political or ideological pressure from right-wing debt nuts or deficit hawks. It moved because it is now more confident in the state of US financial markets — “in light of continued improvement in financial market conditions economic rebound” was the key phrase in the first paragraph of the statement.

But the Fed went on to say: “These changes are intended as a further normalisation of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”

Here in Australia, Reserve Bank governor Glenn Stevens made his first appearance of the year before the House of Representatives Economics Committee. He was confident about Australia, as the bank has been in publications and the minutes of the February board meeting (and in speeches this week by other executives), but he outlined the challenge for the country now we have escaped recession.

He’s said it before in speeches, but this time it was to a group of politicians who might not have caught up with current RBA thinking.

“Now we must turn our attention to the challenges of managing an economic expansion. Issues of capacity, productivity, flexibility, adaptation to structural change and so on will once again come to centre stage, as they should. For our community to tackle those challenges successfully, monetary and financial stability are important conditions.

“With the economy having had only quite a mild downturn, however, we start the new upswing with less spare capacity than would typically be the case after a recession. One measure of this is that the rate of unemployment peaked at less than 6%, much lower than we or most others forecast.

“Only a few years ago, unemployment rates like this would have been seen as a good outcome in strong times, let alone in times of economic weakness. The general flexibility in the labour market, including the ability of firms and employees to adjust hours of work, limited the rise in numbers unemployed. But the overall size of the downturn in economic activity also proved to be considerably smaller than thought likely a year ago.

“This is, of course, a very good outcome. But it also means that there is less scope for robust demand growth without inflation starting to rise again down the track. Monetary policy must therefore be careful not to overstay a very expansionary setting.”

We have been warned.