Federal Reserve Cuts Primary Discount Rate
August 17, 2007
The US Federal Reserve has today announced it has cut the primary discount rate of interest, at which it lends to banks and mortgage lenders.
The news comes after a week of poor trading on stock markets around the world off the back of major doubts about the future of the world economy.
Analysts had feared that growing defaults and liquidity problems spawned by the rogue sub-prime lending market in the US would lead to a global credit crunch, whereby businesses and prospective home owners would be faced with tougher lending policies in a bid to preserve resources.
Last week, the Federal Reserve announced its decision to inject more cash into the banking system as an emergency aid measure.
Today’s news, which sees rates fall from 6.25% to 5.75% are designed to make it easier and cheaper for banks to borrow from the central reserve, which in turn should help ease concerns over credit availability.
After poor trading on world markets this morning, investors were buoyed by this complimentary measure, created to add further weight to the cash aid pledged last week.
After weeks of poor trade across the world, most major markets were sent soaring off the back of the news, which will prove to be a relief for shareholders and investment plans - particularly corporate pension funds, which have been hit badly over the last few days.
The Federaql Reserve strategy has been welcomed by analysts, if not considered extremely unorthodox. The Federal Reserve had not been expected to make any ammendments to interest rates before its September meeting.
The last time the Federal Reserve made any interest rate changes between its six-weekly meetings was September 11th 2001, highlighting the urgency with which the Reserve considers its actions in saving the ailing mortgage market.
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