Friday, August 17, 2007

Fed cuts discount rate by 50 basis points

In reaction to the current liquidity crisis, the Federal Reserve has cut the discount rate, the interest rate that the Fed charges to make direct loans to banks, to 5.75 percent, down from 6.25 percent. The target for the Federal Funds rate remains unchanged at 5.25%.

In a statement explaining the board's action, Federal Reserve Chairman Ben Bernanke and his colleagues said that while incoming data suggest the economy is continuing to expand at a moderate pace, "the downside risks to growth have increased appreciably."

Today might be a good day to measure investor optimism by the reaction to this. If the market is strongly up today on this news, that's potentially an indication that investors believe that the recent market corrections represent an overreaction and a buying opportunity. If the market is sharply down, that might tell us that skittishness is overwhelming the urge to capitalize on an opportunity.

Stay tuned.