Fed Sets Up for Possible Rate Cut
I think more important part of the Fed dropping the discount window rate by 50 basis points to 5.75% for 30 days was the accompanying FOMC statement:
“Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, 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. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”
To me, that says the Fed has changed it’s stance from fighting inflation to addressing the economic impact from the mortgage problems and credit crunch. Instead of having to wait for the September meeting to change it’s stance, now we have a possible rate cut in September if the data will allow the Fed to do so. Keeping the window open for 30 days takes us to the September Fed meeting at which point the Fed can assess the effects of this move today.
