Aug 10 (NYT) — Saying it now feels that the recent disorder in financial markets has raised the risk of an economic downturn, the Federal Reserve today approved a half-percentage point cut in its discount rate on loans to banks….
The upheaval in the credit markets have confronted Ben S. Bernanke, the Fed chairman, with the first crisis of his 18-month tenure. In recent weeks, the Fed has intervened to support the markets by lending in the money markets against mortgage securities and Treasuries. It did so again this morning, by lending $6 billion against mortgage securities. Over all, since Aug. 9, the Fed has injected $94 billion into the financial system by lending in the open market.
The Federal Reserve is scrambling to address the mortgage crisis in an effort to stabilize the US economy. A reduction of the discount rate will specifically target banks that are having short-term financial difficulty (like, Countrywide.) This rate does not have a direct impact on consumers, so we will not see an immediate drop in interest rates. It does however free up financing making loans easier to obtain.
Lending restrictions will remain tight and sub-prime loans difficult to obtain. The ultimate question remains: Will the Feds efforts be enough to bolster consumer confidence? Information may arrive instantly, but insight takes longer. Fortunately, our traditional/seasonal August slowdown will give us an opportunity to sit back and watch the chips fall. Hopefully, the market will announce itself come September.