This morning the Federal Reserve announced that it has cut the dropped the discount rate by 1/2 a point to 5.75%. The statement that came from the Federal Reserve was just as important as the actual move. The Fed acknowledged in their statement that an extraordinary policy shift is needed to contain the subprime 
mortgage collapse and keep the overall economy from suffering greatly. The Fed said recent reports still showing the economy growing at a moderate pace, but that risks to the expansion have risen "appreciably" in the past few weeks. This is the most interesting part of the statement to me since just 10 days ago the Fed's monetary policy statement said they were more concerned about inflation than this problem.
The discount rate cut brought joy to wall street as stocks first rallied huge, with the Dow up by about 300 points around 10 am. The market has since settled back some with the Dow still gaining 140 points. Lehman Brothers Holdings Inc (NYSE: LEH) currently trades up 5%, Bank of America Corporation (NYSE: BAC) trades up 3%. Tech names have also been trading higher so far today with Cisco Systems Inc (NASDAQ: CSCO) up 2.25% and Research in Motion Limited (NASDAQ: RIMM) trading up 4.35%
It is important to note that the discount rate cut is not the same thing as a Federal Funds rate cut. The discount rate is the interest rate that regional Federal Reserve Agencies charge to commerical banks and other depository institutions. The federal funds rate still stands at 5.25% as it did prior to today. The federal funds rate is the rate at which private institutions lend to other insitutions. This move narrowed the credit spread that had been evident for quite a while between the the discount rate and the federal funds rate.
Today's move will not impact consumer borrowing, but it will impact commercial banks and their loan borrowing. The most important part of today's move and statement is that we now know that the Federal Reserve is worried and ready to move to help avoid economic crisis. This news is certainly good for the bulls on wall street. There will likely be another drop sometime soon in the market, but this news makes it more likely that I will want to be buying that next dip instead of waiting out the Fed.
Oh, well, then they’ve confirmed that this is, indeed, "calamity":
"Poole Says Only 'Calamity' Would Justify Rate Cut Now…"
That’s from only a little over 24 hours earlier on Bloomberg and the story is still sitting on their site. Poole didn't slice-and-dice any distinctions in what kind of rate cut.
The economy is controlled by mouth-foaming mad dogs. Go buy some stocks.
Posted by: Ned Didry | August 17, 2007 10:34 AM | Permalink to Comment