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Markets & Stocks
Kandel on Fed's rate cuts
January 5, 2001: 12:11 p.m. ET

Thursday's discount rate cut was procedural, rather than earth-shaking
By CNNfn Financial Editor Myron Kandel
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NEW YORK (CNNfn) - The Federal Reserve surprised everyone with the timing and the magnitude of its interest-rate cuts on Wednesday -- a decrease of half a percentage point in the federal funds rate and a quarter-point drop in the discount rate. The stock market staged an explosive rally, as you may have noticed.

Then, late Thursday, the Fed cut another quarter-point off the discount rate. (That's the largely-symbolic rate the Fed charges on loans to commercial banks.) How come it took two days to do that? There's a story behind that, and it shows that despite its awesome power, the Fed still has to play by the rules.

graphicWhen it comes to the federal funds rate (which is what banks charge one another on overnight loans and is the most sensitive barometer of short-term interest rates), the Fed's policy-makers can take whatever action they deem necessary. These policy-makers -- consisting of the seven governors of the Federal Reserve Board and five presidents of regional Fed banks -- meet every six weeks or so, and they usually move on rates at one of those meetings. But they also can make changes in between, and that's what they did this time around, well before their next regular meeting scheduled for the last two days of January. Obviously, the Fed was worried that the economic slowdown now underway needed a quick and substantial response.

When it comes to changing the discount rate, that decision is made by the seven Fed governors, at the request of one or more of the regional banks. In announcing its quarter-point discount-rate cut on Wednesday, the Fed said that was "the level requested" by seven regional banks. Then it added this unusual comment: "The Board also indicated that it stands ready to approve a further reduction of 25 basis points (meaning a quarter-percentage point) in the discount rate to 5 1/2 percent on the requests of Federal Reserve Banks." How's that for a broad hint?

But why not do it all at once? Because those seven banks that requested a discount-rate cut asked for only a quarter-point. And even though the Fed wanted to cut by twice that much, it couldn't do so unless it was asked. So there was that unusual statement on Wednesday. And no surprise, the regional banks quickly fell into line. So on Thursday, the Fed was able to announce another quarter-point reduction, noting that it was acting on requests by "all twelve" of the regional banks. Note the "all twelve," just to underline the unanimity of the move.

Indeed, Thursday's action was really just procedural, rather than earth-shaking. But it's nice to know that there are rules that even the world's most-powerful financial organization must follow. Now we can focus on just how successful the Fed will be in getting the U.S. economy moving again. graphic

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.