Surprise Fed Move Cuts Discount Rate by a Half Point

In a surprise move, the FOMC cut the Discount rate from 6.25% to 5.75%.

The largely symbolic move signals the Fed’s willingness to take action on the recent collapse in the market for commercial paper, but it may have been enough to pull Countrywide and Washington Mutual out of the fire.

The Discount rate is the rate banks pay to borrow from the Federal Reserve. Cutting the discount rate provides funds to banks but doesn’t change consumer or commercial rates. Banks use this Discount window less, borrowing less than $100 million each day.

The Fed Funds rate, presently 5.25%, is the rate banks pay each other on over night loans and more widely used. Expectations are that the Fed will also lower the Fed Funds rate when they meet in September.

Money now is flowing out of bonds (bad for mortgage rates) and fueling a rally in stocks that has pushed the Dow back through 13,000 at the moment.

Meanwhile, this morning’s Michigan Consumer sentiment fell to 83.8 from 90.4 in July. The expected number was 88, but consumers are sensitive to the headlines and often “feel” bad about things while continuing to spend.

More later…..

Share This