Fed cuts discount rate
The central bank, citing market conditions that have 'deteriorated,' cut the symbolic discount rate by a half of a percentage point.
August 17 2007: 8:41 AM EDT
NEW YORK -- The Federal Reserve, reacting to concerns about the subprime lending crisis and the volatility in the financial markets that have resulted from it, announced Friday that it is cutting its so-called discount rate temporarily by a half percentage point, to 5.75 percent.
The discount rate is the rate the Federal Reserve banks across the country charge qualified lenders - mainly banks - for temporary loans. It is largely symbolic.
The central bank did not change its more closely watched federal funds rate, which affects rates that consumers pay on various types of loans. That rate remains at 5.25 percent.
The Fed last met Aug. 7 and decided to leave both the federal funds and discount rates unchanged. But since then, stocks have plunged further due to fears that some financial institutions and hedge funds were in serious trouble because of the mortgage meltdown.
Read the Fed's statement
Mortgage lender Countrywide Financial (Charts, Fortune 500), for example, announced Thursday that it needed to tap an $11.5 billion line of credit because of liquidity problems. That came a day after an analyst at Merrill Lynch suggested that Countrywide might need to declare bankruptcy.
In a statement, the Fed said that it took the move to "promote the restoration of orderly conditions in financial markets."
In another statement, the central bank indicated that "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."
The Fed added that "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" and that the Fed was prepared to take more action if necessary.
Stock futures, which were initially trading lower Friday following another wild day Thursday, surged higher following the Fed's announcement.
