FED CUTS DISCOUNT RATE: JUST A BANDAID?

So after intense pressure to cut the Fed rate of 5.25 lower, they cut the discount rate which is the rate in which the Federal reserve lends to banks from 6.25 to 5.75 which allows banks to have more access to cash. Liquidity was the problem in the market because of the credit crunch because no one was willing to lend money and borrowing money was too expensive. Now this flushes the market with a lot more liquidity so that the mortgage companies who all were at their very last ends with funding would survive but for how long.

The federal funds rate which is tied to the prime rate which affects consumers and businesses was not cut. Everyone is expecting soon especially with consumer sentiment going down. The temporary bandaid will get us through this period but we have to keep in mind how the full brunt of the housing downturn will affect consumers. “This is fine for temporary relief, but I think they will still have to cut the funds rate because the markets will still be turbulent,” said David Wyss, chief economist at Standard & Poor’s in New York. The main problem is still the housing problem which is flowing into prime mortgages which is merely the beginning because who is going to buy all these mortgages now that they know they are going down. The hedge funds will step in when they see more blood. The market was down really hard before market but with the announcement, the Dow shot up 300 points but we’ll see if it can hold it which will provide the large psychological boost because if it doesn’t, if the Fed can’t save us who can?