In a move that deals more with the psychological side of the market, the FED lowered its key discount rate by half a percentage point. The market reponded by climbing 233.30 points, to go over the 13,000 mark again.
This was done to assuage investors' worries and show the Fed was willing to do something if it needs to. They are hoping this will deal with the panic that has been growing by many investors. The Fed will watch to see if the psychological lift will hold. They're hoping they won't have to cut the federal funds rate, which is much more important than the discount rate cut.
The discount rate covers loans the Fed makes to banks, while the Fed funds rate decides what banks will charge one another for loans.
Hugh Whelan, managing director at Hartford Investment Management Co. said, "Today's move, while helpful psychologically, didn't really alter the stresses on the system. If you're a leveraged financial institution, a leveraged individual, a leveraged hedge fund, on Monday when you walk in, you're still facing the same stresses you faced today and yesterday."
A lot of people believe things won't calm down until the fed funds rate is cut, which has been at 5.25 percent for over a year. Bernanke is resisting this as long as he can, as he's committed to battling inflation which could increase if rates are cut.
Like I mentioned, this is totally a psychological response, meaning the Fed sees people are stressed and needed reassurance. If it is able to calm things down doing this, it will keep them from making moves they don't want to make. The Fed said in a statement though, that it "is prepared to act as needed."
Sponsored link: The outsourcing every manager requires - Tampa Locksmith
Comment Preview