In its press release today, the Federal Reserve announced that “the downside risks to growth have increased appreciably,” and cut the stated Fed Discount Rate by half a point (from 6.25% to 5.75%), also stating that they “will act as needed to mitigage the adverse effects on the economy arising from disruption in the financial markets.”  In the discount rate action press release, the Fed stated this move is intended “to promote the restoration of orderly conditions in financial markets” and that the changes “will remain in place until the Federal Reserve determines that market liquidity has improved materially.” This is not a stated change in the Federal Funds Rate target, currently 5.25%, but is an explicit rate controlled by the Fed. The Federal Reserve has not made any direct statements about the targeted Federal Fund Rate yet, but changing the Discount Rate and injecting liquidity the past couple of weeks indicates that the Fed Funds Rate target will probably be lower as well, perhaps announced at the September meeting (since 1995 the Federal Reserve has stated a targeted Federal Funds Rate).  This should send mortgage rates down (ultimately) and the effective Federal Funds Rate will probably be there by the next official meeting anyway. Perhaps this gives the Fed time to see how the rates are affecting institutions and the markets. But yes, the Fed is easing in response to the credit and market turmoil we have seen increasing over the past few weeks. Â
    There will be lots of discussion on this move however. Personally I’m glad the Fed cut rates, but it’s a little disconcerting to me regarding the signal it sends. To react this quickly indicates to me that there are financial rumblings in areas we haven’t even begun to see yet.  How will this affect the consumer? It certainly should make it easier for mortgage lending companies to do business, and for consumers to qualify and complete loans for buying or refinancing a home. That was a big issue the past few weeks… companies couldn’t complete loan originations in an already difficult housing market. The futures market seems to like this move… Dow futures were down over 100 points earlier this morning, and the market just opened with the Dow up almost 300 points! Let’s hope it’s not a temporary reprieve.
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