The Fed, in a surprise announcement in Washington, lowered the so-called discount rate by 0.5 percentage point, to 5.75 percent. Policy makers dropped language indicating their bias toward fighting inflation, and instead highlighted a rising threat to economic growth. [Fed Cuts Discount Rate to 5.75% to Ease Credit Crunch (Update4). Bloomberg. August 17 2007]
Economic slowdown has taken over inflation as the greater concern!
I cannot wait to see what will happen to the federal fund rate in about a month time! By the way the market is reacting, the FFR might stay unchanged though.
It is worth noting that the T-bills yield curve is slight inverted in the short run and pretty much flat in the long run.
p/s — amid the cut, dissent emerges. The reason for dissent against rate cut revolves around the economic concept of moral hazard.
The subprime crisis is really created by borrowers lending to those that do not have the credit rating to borrow money. With the Fed coming out to bail a risky market, it only encourages risky activities to continue because lenders know that the Fed provides them with a safety net. This is why bail out is usually frowned upon.
Normatively, I am against rate cut but a rate cut is what I am expecting as far as the subprime mortgage episode is concerned.
This issue surrounding moral hazard might prevent the FFR from declining next month. So, the roller coaster ride might not end just yet.
One reply on “[1337] Of Fed cuts discount rate!”
[…] of the US economy, partly signaled by the slowdown in demand for electronics as well as the subprime mortgage crisis affect trade between Malaysia and the US adversely. The effect however is being mitigated by large […]