Friday, August 17, 2007

Fed Discount Rate Cut .50% - Bernanke Throws Money From Helicopters at the Market

Reuters just reported. It made no change to the Fed Funds Rate.

The Discount Rate - the rate the Fed charges its member banks for loans - was dropped from 6.25% down to 5.75%, to soothe investors concerns, making liquity for financial institutions cheaper and easier to obtain. Funds are seldom borrowed this way and when done they are on a short term basis, to meet temporary shortages in liquidity caused by disruptions in the market. It is meant to be used for situations just like what we are experiencing now.

The Fed Funds Rate, which has not been changed, is the interest rate which banks charge each other to lend part of the the balances they are required to hold at the Federal Reserve for an overnight period. There is much speculatation that this will be dropped when the Fed meets in October.

This will bring temporary, but not permanent relief to the current mortgage crisis. It may also have negative impact on the value of the US Dollar as it strips the Dollar of is current safe-haven status.


Anonymous said...

One thing it does finally indicate is that the Fed is awake and no longer JUST beating the drum on inflation. I think this is a very positive sign as to the Fed's indication of current market conditions. They are not asleep at the wheel after all.

Admin said...

I don't disagree that it was needed. I am now worried about the effects this concession will have on the value of the US Dollar. Already the dollar is trading down versus the euro and pound for the first time this week. To some degree, the more the goverment moves to save our domestic housing market, the weaker we become as a global economic power.