The Federal Reserve made the highly unusual move that had been rumored on Wall Street since at least Wednesday night, cutting the discount rate for Fed loan to banks by fifty basis points. The discount rate covers the interest on loans, which are called reps, that are collateralized by lower quality securities not backed by government agencies than loans made under the federal funds rate.
The cut in the discount rate moves the rate to 5.75 percent from 6.25 percent. The more important federal funds rate remains unchanged at 5.25 percent. Some say that the discount window rate cut is mostly a symbolic act, since so little borrowing is made from the window. Others are saying that the borrowing at the discount window may increase since the cut close the gap between the two rates, making the penalty for borrowing with non-government securities far smaller.
Several companies that have recently had trouble borrowing money, including home lender Countrywide, may now find it easier and cheaper to borrow, as banks, thrifts and credit unions will be able to avail themselves of more cash to lend at cheaper rates in exchange for lower quality securities. It also may have the effect of creating a more liquid market in many credit products, including mortgage backed debt securities.
Another change coming from the the Fed may also help ease pressure on the credit markets. Ordinarily, money available at the discount window may only be borrowed on a very short term basis. Today the Fed has expanded the "repo periods" to as long as thirty days.
Equity futures jumped almost immediately. Although the Fed Funds target rate remains unchanged, the Federal Open Market Committee said it was monitoring market and economic conditions and was "prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."
The Fed cited "financial market conditions" and "tighter credit conditions" in making the move. Significantly, the Fed indicated that uncertainty in the credit and capital markets might extend beyond the financial markets and "restrain economic growth going forward." Many believe the recent freezing up of the commercial paper market may have prompted this morning's move.
Press Release From Federal Reserve [Federal Reserve]
Posted by Random Banker, Aug 17, 2007 9:34AM
This is clearly aimed at Countrywide so that they can finance operations through Repos and you know, not go bankrupt. That being said there was never any chance of CFC going under. Cerberus or BofA or any number of other player would come in and buy them.