Fed Cuts Discount Rate

Jim Cramer got what he was looking for. This morning, the Fed lowered their Discount Rate by .500%, taking it from 6.250% down to 5.750%. The discount Rate is the rate at which the Fed lends money directly to commercial banks, credit unions and savings and loans, including large lenders like Countrywide and Bank of America. It is different than the Fed Funds Rate, which is the rate at which banks lend money to other banks. The Discount rate is usually held 1.000% above the Fed Funds Rate, which makes the Fed a last resort for lending institutions to borrow from. They would generally rather borrow from other banks at a lower rate, but with the current liquidity crisis making that difficult, this move will help provide some liquidity at more desirable rates in the short term.

This move has a direct benefit to banks and lenders more so than to consumers. The Fed is taking baby steps to help put some lubrication into the markets while being careful not to send the message that they will serve as a 'lender of last resort' to bail out institutions and individuals who face suffering loss as a result of poor decision making. This move softens things a little, but is not a bail-out move. They will let the markets second-guess recent behavior and correct themselves, but need to help guide so as to avoid a complete systemic breakdown. Its a fine line, and this is a baby step. The next few weeks will certainly be interesting, to see how much adjustment can be made, and how much stability can be built back