Fed cuts discount rate Dow rebounds, but for how long?
In just more than one hour of active trading, spanning the last 55 minutes on Thursday and the opening few minutes on Friday, the Dow Jones Industrial Average rallied more than 600 points.
The index made back 350 points in the last hour of trading Thursday to close basically flat for the day; and prior to Friday’s open, the Federal Reserve Board cut the discount rate by 50 basis points, to 5.75% from 6.25%, causing the Dow to rally 300 points in the open. The Fed called the move temporary and also announced a change in their practices to allow term financing for up to 30 days. The Fed statement noted, “The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially.”
The Fed move comes 10 days after its policy statement following the August meeting when it stated that although there was greater risk of reduced growth due to credit market problems, the prevailing risk to the economy was still higher inflation.
The Fed released a second statement following Friday’s move to explain its decision further, stating, “Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably.”
While the move should take some pressure off of credit markets, it caused a jolt to the market, which may have hurt numerous option and short positions.
