US central bank slashes primary discount rate in unusual move to make available liquidity to banks
(WASHINGTON) In a surprise move to calm rattled financial markets, the US central bank made a half percentage point cut yesterday in the rate at which it lends money to other banks and at the same time made a fresh injection of another US$6 billion into the distressed US financial system.
Mr Bernanke: His rate cut bolsters US and European stocks The moves sent European and US stocks soaring. But market euphoria later faded as investors questioned whether the Fed's action would be enough.
The Dow Jones Industrial Average was up 151.68 points, or 1.18 per cent, at 12,997.46 just before midday. It had earlier risen more than 300 points. The Standard & Poor's 500 Index was up 21.72 points, or 1.54 per cent, at 1,432.99. The Nasdaq Composite Index was up 31.33 points, or 1.28 per cent, at 2,482.40 after earlier rising as high as 3 per cent.
The pan-European FTSEurofirst 300 index unofficially closed 2.4 per cent higher, at 1,475.99 points, after rising as much as 3.5 per cent after the Fed's move. The benchmark index, which closed the week 0.2 per cent down, had dropped to a year low of 1,426.51 points earlier in the session.
'There's still just as much of a risk that the market could be down another 5-10 per cent three months from now,' said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.
'I don't think we've solved all the credit market problems with this move from the Fed today. Are they going to get worse? We don't know. I don't think anyone knows with certainty that things won't get worse than they are right now.'
Bank stocks, which have borne the brunt of recent credit market turmoil, were some of the biggest initial gainers. At the same time, the Chicago Board Options Exchange Volatility Index, Wall Street's main barometer of investor fear, dropped 9.28 per cent to 27.97.
The Federal Reserve, in a highly unusual move, lowered the primary discount rate governing direct loans to banks to 5.75 per cent from 6.25, a move intended to boost the amount of money available in the financial system.
Fed policy-makers also dropped language indicating their bias towards fighting inflation, and instead highlighted a rising threat to economic growth.
But the Fed did not change its target for the more important federal funds rate, leaving the benchmark interest rate at 5.25 per cent.
The cut is highly unusual, given that the Fed does not normally change interest rates in between its regular, six-weekly meetings.
The last time it did so was after the 9-11 attacks, when the financial markets were closed. The latest move, which again unusually came just before the US markets opened yesterday, showed how seriously the Fed was viewing the escalating fallout from the sub-prime crisis.
'Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth,' the Federal Open Market Committee said in a statement released in Washington. 'The downside risks have increased appreciably.'
The committee is 'prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets', the statement said.
This is the first reduction in borrowing costs between scheduled meetings since 2001, and Ben Bernanke's first as Fed chairman. Officials kept the benchmark federal funds rate target for overnight loans between banks at 5.25 per cent. Policy-makers next meet to set the rate on Sept 18.
The action 'will basically do more to unclog the credit channels than a fed funds rate cut would have,' Drew Matus, senior economist at Lehman Brothers Holdings Inc in New York who used to work at the Fed, told Bloomberg. -- Reuters, Bloomberg, NYT, AFP
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