The Fed rode to the rescue this morning, throwing a life line to financial institutions with a half point cut in its discount rate. It also ignited a new debate about whether there's a cut to the target Fed funds rate at its September meeting.
Stocks soared from the start with financials the biggest beneficiary. Stock futures reversed immediately when the Fed made its announcement at 815 am New York time, and European markets turned sharply higher.
The Fed's discount rate is the rate it uses for short term lending to financial institutions. It trimmed the rate to 5.75%. The Fed did not cut its main rate, the Fed funds target which is at 5.25%. In a statement, the Fed said it judges that "the downside risks to growth have increased appreciably."
"This is a targeted effort by the Fed. It does not cut the overall target rate. What it does is inject liquidity. This allows a bank to go with a pool of sub prime mortgages and get short-term overnight financing," says CNBC's senior economic correspondent Steve Liesman. "this is intermediate step. its something the Fed is throwing out there to see if it works."
Scotsman Capital Managing Director Vince Farrell said the Fed is relaxing all kind of rules for banks. Regarding "the discount rate cut- banks can bring virtually any security to the discount window as collateral - like mortgage backed securities - (usually only Treasury for Fed Funds borrowing.)," he wrote in a note to us today. "They also extended the term from overnight to 30 days and terms are renewable. So the Fed is allowing the banks to liquify some of their "frozen" assets. This is a big deal. Some will wonder why not cut a full point to match the Fed Funds rate, but as I have said before, I think the Fed will have a very high pain threshold and will not want to be seen as bailing out the speculators."
Mad Money Moment
CNBC's Jim Cramer was not shy about telling the world the Fed should cut rates. He's been calling for it loud and clear and today he says the Fed made the right move at the right moment.