FED LOWERS KEY DISCOUNT RATE HALF POINT

From USA Today:

Stocks soared Friday after the Federal Reserve did what Wall Street was clamoring for and cut its key discount rate a half percentage point.

The move quelled investors' credit worries at least for the time being and initially sent the Dow Jones industrials up more than 300 points before retreating some.

The Fed — which had resisted lowering rates despite weeks of market volatility, and instead added nearly $120 billion in liquidity into the banking system — cut its discount rate to 5.75% from 6.25%. The Fed acknowledged that the stock market turbulence that has pulled the Dow by hundreds of points a day was posing a risk to economic growth.

But the central bank made no mention of lowering its target for the federal funds rate, which has stood at 5.25% for more than a year. The fed funds rate determines the rates that banks charge each other for loans, while the discount rate only covers loans the Fed makes to banks. Many strategists believe the market won't settle down until the Fed lowers the fed funds rate target, considered a more significant benchmark.

Traders who bet on how the Fed might alter rates now expect the central bank will lower the benchmark fed funds rate at its next meeting on Sept. 18. Some investors are hoping for a cut in that benchmark rate even sooner.

"If the cut in the discount rate succeeds in restoring confidence, then perhaps there is no need for the Fed to cut rates at the Sept. 18 meeting," said John Lonski, chief economist of Moody's Investor Service. He added, though, that the key line in the Fed's statement Friday was its willingness to take more steps to prevent market volatility from harming the economy.

"That means the Fed is prepared to make a rate cut if stability doesn't come," Lonski said.