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Fed cuts discount rate
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January 4, 2001: 7:44 p.m. ET
Lowers symbolic rate by another quarter point at request of regional banks
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NEW YORK (CNNfn) - The Federal Reserve Thursday lowered the U.S. discount rate a quarter percentage point, a day after slashing both the discount rate and the fed funds rate amid signs of a slowing economy.
The central bank, which sets U.S. monetary policy, lowered the discount rate by another quarter percentage point to 5.5 percent from 5.75. On Wednesday, the Fed cut the discount rate a quarter-point from 6.0 percent to augment a half-point cut in the key federal funds overnight bank lending rate.
The central bank said its board of governors had voted on the cut in the discount rate, the rate charged on Fed loans to commercial banks, unanimously at the request of all 12 regional Federal Reserve banks. The central bank had said Wednesday it was prepared to move the discount rate if the regional banks asked it to do so.
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This rate cut is more symbolic, but it also causes a great deal of a psychological benefit to the market
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Art Hogan
Chief Market Analyst
Jefferies & Co. |
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The discount rate is the rate of interest that the Fed would charge commercial banks to borrow money if they needed it. This option is rarely exercised, however, since most U.S. banks lend money to each other.
The Fed only moves the rate at the request of the regional Fed banks.
The move will likely have a psychological effect on Wall Street, which could help boost the markets on Friday, one analyst said.
"This rate cut is more symbolic, but it also causes a great deal of a psychological benefit to the market," said Jefferies & Co. chief market analyst Art Hogan.
The Fed surprised economists and investors Wednesday by lowering interest rates in between its regular policy-making meetings. That was the first time in more than two years the Fed has cut interest rates in between meetings.
 In an interview on CNNfn's Moneyline News Hour Thursday, former Fed vice chairman Alan Blinder said the surprise Fed action indicates that Greenspan is quite concerned about the economy and that additional rate cuts are imminent. (143K WAV) or (143K AIFF)
The original Wednesday move had an immediate effect on the markets, sending the Nasdaq soaring to record gains. But stocks retreated Thursday as the markets absorbed the news and fears over quarterly profit shortfalls and sluggish retail sales came back into focus.
Slashing interest rates makes it easier for consumers to obtain financing for big ticket purchases such as automobiles and homes and boosts confidence, helping loosen up wallets at the mall.
Some economists had expected the Fed to cut rates before the Jan. 30-31 Federal Open Market Committee meeting, following a spate of reports indicating the economy was cooling off much faster than anticipated, with drops in retail sales, consumer confidence and manufacturing output.
-- Reuters contributed to this report 
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