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Daily Real Estate News | August 20, 2007
Fed Cuts Discount Rate, Promises More
In an effort to stabilize financial markets, the Federal Reserve last Friday cut the discount rate that it charges to make direct loans to banks from 6.25 percent to 5.75 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, but it sent a strong signal in its public statement that it was prepared to cut that rate as well.
In making the reduction the Fed stated, "the downside risks to growth have increased appreciably." The Fed did not refer to inflation, which was the concern that previously kept it from cutting the federal funds rate.
"They provided a much needed response to the growing market turmoil today, but they will have to do more," says Mark Zandi, chief economist at Moody's Economy.com.
The move to cut the discount rate will not have a major impact on consumer interest rates in the way that cutting the federal funds rate triggers an immediate drop in banks' prime lending rate, the benchmark for millions of consumer and business loans.
However, Friday's move was expected to help with a severe cash crunch facing many businesses, including mortgage companies, which are having trouble getting loans for short-term financing needs.
Source: The Associated Press, Martin Crutsinger (08/17/07)
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