Breaking!!! ==> Fed cuts discount rate by 50 basis points (from 6.25% to 5.75%)

NEW -> Contingent Buyer Assistance Program
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oc-conservative_IHB

New member
I didn't think it would be so soon!

The discount rate is the rate that the Fed charges to make direct loans to banks. The fed funds rate, however, remains at 5.25%. As I said before, the pressure on the economy will be too great for the Fed not to act. Is the fed funds rate next?

>>>August 17 (Bloomberg) -- The Federal Reserve, in an unscheduled announcement, cut its discount rate and said it's prepared to take further actions to ``mitigate'' damage to the economy from the rout in global credit markets.

``Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward,'' the central bank's Federal Open Market Committee said in a statement released in Washington. ``The downside risks have increased appreciably.''

In the statement, the committee said it is ``prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets.''<<<
 
so now we know they'd do it....question is: will this actually loosen the credit crunch? i have a strange feeling it won't...what do you all think?
 
Do not underestimate the psychological effect. For example, financial markets around the world were tumbling the last few days and as a result look at all the doom and gloom posts here. People were even jokingly, but understandably so, wanting to put cash under their mattress.

Additional commentary:

>>>The timing of the Fed's surprise discount-rate cut was exceptional, occurring at a time when speculators would arguably have significant difficulties reversing their short positions in numerous asset classes. The Federal Reserve is likely to lower the fed funds rate by at least a quarter-point by the Sept. 18 FOMC meeting.

The cut in the discount rate will impart almost no direct benefit on the U.S. economy, given that the discount window is rarely used. In fact, only $187 million was borrowed on average each day for the past year. Moreover, most debt obligations are tied to the fed funds rate, which is why it is imperative that the Fed validate this largely valid, but important action with a cut in the fed funds rate.<<<
 
This is like announcing Portola Springs is having a one year anniversary party. Yee-hah. I think I will go get my face painted.
 
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That's all I have to say on the matter.
 
Like I said before, a rate cut does not mean it's time to break out party hats. It means the doody has hit the rotating oscillator. Maybe the herd of bulls said "oh, wait just a minute...."
 
The thing that caught my eye was this:



"The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets."

The extension of the financing from overnight is pretty interesting. Do you think this was caused by people pulling their cash from Countrywide's bank? One of the parties asking for the cut was FRB of SF.
 
More commentary (ala Tony Crescenzi of RealMoney):

>>>The idea that the need for a cut in the fed funds rate is now reduced is weakened substantially by the puny economic benefit that the cut in the discount rate will impart, and, more importantly, by the fragile state of investor confidence.

The discount window is open to depository institutions but it is also available "in unusual and exigent circumstances" to individuals, partnerships and corporations that are not depository institutions if, in the judgment of a Federal Reserve Bank, credit is not available from other sources and failure to obtain such credit would adversely affect the economy. Such credit has not been used since the 1930s.

Although new Federal Reserve rules were changed in 2003, in part to reduce the stigma of borrowing from the discount window, a stigma probably still exists. The Fed's Reserve Banks do not disclose the names of borrowers from the discount window, inferences might still be drawn from the location of the Reserve Bank that receives the request for a loan from the discount window. Moreover, there is always the risk that information leaks out, even though it would be improper.

The stigma of being seen as having to ask the Fed for money instead of the markets acts as a deterrence against its use. Only to prevent insolvency or to sustain the viability of operations would a company likely seek substantial amounts of credit from the Federal Reserve.

Nevertheless, the cut in the primary lending rate to 5.75% closes the gap to the 5.25% fed funds rate, which should help reduce the stigma a bit. It is likely that the Fed will restore the percentage-point spread between the primary lending rate and the fed funds rate when credit conditions stabilize. Doing so would be a symbolic act signaling increased confidence in a return to normalcy in the financial system. <<<
 
I think Eva has it with the term change. Basically, the Fed is moving to keep Countrywide solvent so they don't have to deal with a giant bank default which will panic the herd and really tumble the markets and spur a credit crunch.
 
The idea that this Fed move will have an effect in the global credit markets is akin to farting in the bathtub and calling it a jacuzzi.
 
Speaking of window dressing...

One of the odd things in last night's LAT story, was that the President of Impac was at his local Countrywide branch in LN withdrawing $500K, "even if it meant losing 90 days of interest."

My husband thought it was a publicity stunt, and I think he's right. Who among us would know what the President of Impac looks like to know to stop him for an interview. Why would he be telling the reporter how much he took out? And, notably, why did he go the branch rather than doing an EFT?

Totally O/T, and probably too late, but someone should remind Mr. Mozilo of the benefits of sunscreen.

{Note: registration required to access the LAT story.}
 
The biggest problem will continue to be the increasing number of foreclosures (ie. squatters losing their homes) and total lack of buyers to absorb current inventory.

Until this problem is addressed, I agree that the underlying problem is still out there whether or not the credit markets are stable for a day or in disarray.

Eva - nice! guess he did forget to buy sunscreen to go with the yacht and vacation he bought using all the Countrywide stock he sold.

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As soon as I heard the headlines, all I could think of was Andy Kaufman doing this rare skit where he bangs on a bongo screaming "Cash for the merchandise, cash for the hard goods, cash for the soft goods" over and over.

Does anyone remember it???
 
Today eerily reminds me of January 2001 when Greenspan started his notorious rate cuts.

It temporarily propped the market for a few weeks, but eventually the market went down painfully for another 2 years.

Only by lowering rates to historic proportions, creating another bubble, and going to war was the government able to get us out of a recession.
 
I think its almost criminal for the fed to get involved like it did.Anybody that was short was totally blown away. We have an open and free market for a reason. These corrections need to occur and are just postponed by this fed action. I guess when they saw the Nikkei sell of by 5% last night they were worried about a panic. Well just the fact they are putting this band-aid on a severed artery speaks volumes. Country Wide will go away shortly. Who in the right mind would invest in a Bank that was in doubt to survive ?

I talked with my Banker last night. She has been a great friend for over 10 years. She had a memo she got from corporate regarding Countrywide. Basically it said that new customers were coming and that Countrywide would offer some silly high interest rates to try to preserve some deposits.Countrywide is a huge company. When it fails it will bring to light the foolishness of the last few years of exotic loans and the stupidity that has brought the housing market where it is today. And the Tan Man will walk away with almost a Billion dollars that he has gotten from his stock sales. Bet he and Ken Lay see each other very soon.
 
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