Fed’s action gives markets some relief

Jill Barshay Aug 17, 2007
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Fed’s action gives markets some relief

Jill Barshay Aug 17, 2007
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KAI RYSSDAL: Most investors and a whole lot of economists have been calling for the Federal Reserve to do something — anything — to make the pain on Wall Street stop. For a week-and-a-half they got nothing. And then an hour before the opening bell today the Federal Reserve made its move. It cut interest rates.

But not the rate most of us are familar with. That would be the Federal Funds rate, what banks charge each other to borrow money overnight. It’s the Fed’s big policy tool, the one they meet to talk about every six weeks or so. The one that can affect things like your mortgage.

What they cut this morning was something called the discount rate. What banks have to pay to borrow from the Fed itself. It’s usually higher than the Federal Funds rate, a percentage point higher. So banks use it only when they’re in a bind. Like they’ve been the past couple of weeks. Today the Fed cut the discount rate half a percentage point to help ’em out. Our New York bureau chief Jill Barshay has more..


Jill Barshay: Last week, the Federal Reserve pumped cash into the market to help keep interest rates stable. But it wasn’t enough to soothe financial institutions’ nerves about lending money to each other. So this morning the Fed stepped in to play banker.

Alan Levenson is the chief economist at T. Rowe Price. He said the Fed not only cut the special discount rate for banks, it’s also letting them keep the money for 30 days. Usually banks have to pay it back overnight. That could help companies like Countrywide Mortgage, which owns a bank. Countrywide found it couldn’t raise money by selling commercial paper.

Alan Levenson: It almost has the function of the Fed replacing commercial paper-type borrowing for many of these institutions. What the Fed is saying is, “We’ll be your lender. If the normal counterparty that doesn’t want to accept your collateral in exchange for a loan, we’ll be your lender now.”

The Fed’s move to cut the discount rate is a switch from last week when it said it was worried about inflation.

Glenn Yago is an economist at the Milken Institute. He says those inflation worries are still here. But the market turmoil is a more urgent concern. He says the Fed is taking the most cautious steps it can to calm things down.

Glenn Yago: There’s no indication of why you would want to fully, rapidly, reduce rates. Then you really would have the . . . you’d let slip the dogs of inflation.

The Fed is keeping its fingers crossed that the market will stay on the upswing after today. But if this discount rate cut doesn’t do the trick long-term, the Fed may have no other option left but to take the third step: lowering interest rates.

In New York, I’m Jill Barshay for Marketplace.

Ryssdal: There were a couple of other stories out of the market this week that are worth mentioning. First of all, commodities. Nice gains today along with everything else. But in case you missed the rest of the week, not so good. Gold tumbled 3 percent yesterday. Investors were selling to cover their losses in stocks. The other thing is the dollar. It gave up a seven-week high against other major currencies when the Fed cut the discount rate today.

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