The Fed prescribes… relaxed credit

Scott Jagow Aug 17, 2007


Scott Jagow: The Federal Reserve gave Wall Street a very pleasant surprise this morning. The Fed lowered its discount rate on bank loans by half a percentage point.

Now, this isn’t the interest rate we always talk about with the Fed. That’s the Federal Funds rate. This is something different, but it’s still a dramatic move by the Fed to keep credit flowing and give stock markets a lift.

I’ll say. So far, the Dow is up 242 points to 13,088. The NASDAQ has already climbed 52 to 2,503. The S&P 500 is up 33 points. [ As of 6:50 a.m. PT ]

In Europe, shares also had a big bounce right after the Fed’s announcement, but the decision came too late for Tokyo. The Nikkei had its worst day since September 11, a five and a half percent drop.

Economist Richard DeKaser joins us now. Richard, what exactly does this move by the Fed do for banks?

Richard DeKaser: By lowering this rate, they’re essentially reducing the penalty by having to go directly to the Federal Reserve’s discount window, so banks are still able to access those funds, though at cheaper costs and that should help accomplish what they’ve been struggling with for the past two weeks which is getting money to the banks quickly to tide them over until they can raise the funds that they need on their own.

Jagow: So perhaps this is a baby step on the way to cutting the Federal Funds Rate?

DeKaser: It could be. That still remains to be seen. It’s certainly a precursor in the sense that it’s logical that they’d take this step before cutting the Federal Funds Rate. It doesn’t necessarily mean that they’ll cut the Federal Funds Rate.

Jagow: Is there any downside to the Fed doing this?

DeKaser: I don’t see any downside whatsoever. That is to say, it could theoretically under unusual circumstances encourage excessive borrowing by some financial institutions, but in these current circumstances that’s not the case.

Jagow: All right Richard thanks for joining us.

DeKaser: You’re welcome.

Jagow: Richard DeKaser is chief economist with National City Corporation.

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