The announcement that the Fed is raising the discount rate from 1/2% to 3/4% triggered a reaction in the financial markets with bond traders apparently expecting further tightening in the form of rising interest rates. Various people ranging from Mark Thoma to Jim Hamilton declaring that this is not a tightening but an adjustment to other changes such as their raising the amount they plan to pay on reserves banks park at the Fed, which is arguably a sort of tightening.
I agree that the discount rate is not a tightening and is not in itself a sign of likely more tightening per se. However, it is a fact that the Fed is in a gradually tightening scenario that it has announced for some time. This involves removing itself from the many special credit facilities that it put into place in the immediate wake of the crisis, several of which shut down as of Feb. 1, including the very crucial swap arrangements with the ECB and some other foreign central banks. Probably the most important one is the gradual unwinding of Fed support for the housing mortgage market through purchasing MBSs, which is supposed to end on (or about) March 25. That looms as a crucial date regarding the still rather weak recovery. It is not clear if Fannie Mae or Freddie Mac or anybody else is going to really step in and support those markets, and if they do not, we shall probably be in for a double dip in this recession.