Friday, August 17, 2007

Fed Cuts Discount Rate

The Federal Reserve, reacting to concerns about the subprime lending crisis and the volatility in the financial markets that have resulted from it, announced Friday that it is cutting its so-called discount rate temporarily by a half percentage point, to 5.75 percent.

This move was unexpected and signaled the Federal Reserve was worried that a continuation of the credit crisis could push the economy into recession.

The Federal Reserve just recently felt that inflation was a greater risk to the economy than recession. The wild stock market gyrations have led them to conclude otherwise.
In another statement, the central bank indicated that "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."

The Fed added that "although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably" and that the Fed was prepared to take more action if necessary.

Stock futures, which were initially trading lower Friday following another wild day Thursday, surged higher following the Fed's announcement.
Will this be enough to calm the markets? In the short term it should be but if more bad news comes out regarding the credit crisis due to the subprime mortgage disaster then all bets are off.

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