Fed Cuts Discount Rate by 1 Half-Percentage Point
WASHINGTON (AP) -- The Federal Reserve, declaring that increased economic uncertainty poses risks for U.S. business growth, announced Friday that it has approved a half-percentage point cut in its discount rate on loans to banks.
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The action was the most dramatic effort yet by the central bank to restore calm to global financial markets which have been roiled in the past week by a widening credit crisis.
The decision means that the discount rate, the interest rate that the Fed charges to make direct loans to banks will be lowered to 5.75 percent, down from 6.25 percent.
The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year.
However, it has been infusing billions of dollars in money into the banking system over the past week to keep that rate from rising above the target level.
Many economists believe if the financial market crisis worsens the Fed will soon move to cut the federal funds rate as well.
The nation's once high-flying housing market is sinking deeper into gloom, and credit, the lifeblood of the economy, is drying up. Many economists believe these problems, including declining consumer confidence, could lead to a recession.
Since setting a record close of 14,000.41 just a month ago, the Dow Jones industrial average has shed 1,154.63 points in a string of triple-digit losing days that have raised anxiety levels not just on Wall Street but on Main Street as well.
The markets have been pummeled by a rapidly spreading credit crisis that began with rising defaults in subprime mortgages -- home loans made to people with weak credit histories. Now the problems are spreading to other borrowers.
Countrywide Financial Corp., the nation's largest mortgage banker, was forced to borrow $11.5 billion on Thursday so it could keep making home loans. It was a move that rattled investors who have watched a number of smaller mortgage companies go under because of credit problems.
The shockwaves have extended to giant Wall Street investment firms such as Goldman Sachs, which announced earlier this week that it was pumping $2 billion into one of its struggling hedge funds. BNP Paribas, France's largest bank, last week froze three funds that had invested in the troubled U.S. mortgage market.
The Fed and other central banks already had infused the banking system with billions of dollars in an effort to keep short-term interest rates from surging and making credit even more difficult to obtain. However, those billions did not calm investors worried about which big hedge fund or mortgage company will be the next to announce serious problems. For that reason, investors have become fearful to supply money through credit markets to companies even if they have strong credit records.
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