Fed Cuts Discount Rate

Amid some rumors late yesterday that an emergency FOMC meeting was being held to discuss an inter-meeting cut to the Federeal Funds target rate, the Federal Reserve cut the discount rate this morning to 5.75 percent:

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. 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.

Here’s the FOMC’s most recent press statement from this morning, which alludes to the conditions that led to the Fed’s decision to take action:

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

This move makes it more likely that we’ll see a cut in the Federal Funds target rate at the next meeting, and probably signals an end to remarks by the Fed’s Poole that the mortgage mess isn’t having an impact. Update: Bloomberg’s now covering this, and has posted the full text of both the FOMC and FRB’s statements. Nouriel Roubini also addresses the cut, saying the effect of this cut is “mostly cosmetic” and that the Fed has essentially already cut the Fed Funds rate.

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