Discount Rate Cut Could Be Reversed

Discussion in 'Trading' started by THE-BEAKER, Aug 21, 2007.

  1. anyone actually read the statement.

    i know i did not.

    i just assumed same as everyone else.

    but according to this statement the rate cut is only temporary and can be taken back.

    on previous rate cuts the word temporary was not present in the statement.

    i checked and this is the case.

    it is only present in this statement.

    also as they did not cut the fed funds rate the market may have got this one wrong.

    so there is the possibility that the discount rate cut might be taken back.

    here below is the statement.

    To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.
  2. Yeah, I caught that. The market, though, focused on what appeared to be a shift toward worry about the economy vs. worry about inflation.

    Not that either really means anything.

    I'm still waiting for someone to explain to me how lower rates by the Fed (meaning the Funds target rate) will help sort out the credit crunch issue. Rates in the market are already very low (look at the T-Bill market). That's because no one wants to take any risk so they're pilling in to the Bill market. Lowering rates won't help calm those nerves. Either the psychology needs to change or the rates need to be high enough to offset concerns about risk.
  3. agreed.

    you cant keep making the same minimum payment and increasing the credit limit on your card as we all know.

    at some point you have to cut the card up and pay back the debt.

    this is the issue here.

    not a cheaper rate to borrow more money.
  4. Unlikely in the near future, since the Fed extended commercial bank loans to 30 days.

    The Fed even might lower it 0.25% soon, so banks may improve their liquidity.

    What the fed is doing is to get the discount rate closer to the funds rate, thus improving liquidity without worsening inflation.
  5. I don't think this is likely
  6. I sure hope they're not that stupid.

    "where are we going, and why are we in this handbasket?"
  7. Completely agree.

    I think the Fed may lower only the discount rate in December.

    Be aware that the Discount Rate is much symbolic. Few banks use it, because of the higher rates, and the bad image it gives.