“What the Fed is really saying is that this recovery is more in danger than it has been since it started nearly six years ago,” said Jan Hatzius, chief United States economist for Goldman Sachs, who predicted an initial cut in the funds rate to 5 percent, from the present 5.25 percent.
The discount move, coupled with formal acknowledgment that the economy might be in trouble, represents Mr. Bernanke’s boldest attempts to relieve the financial crisis, his first real test since becoming Fed chairman 18 months ago.
Fearing Slide in Economy, Fed Cuts Its Discount Rate
By LOUIS UCHITELLE
The Federal Reserve, saying for the first time that the recent disorder in the financial markets has raised the risk of an economic downturn, took the unusual step yesterday of encouraging the nation’s banks to borrow directly from the Fed, particularly to support home mortgage lending.
The early morning announcement of a drop in the so-called discount rate, made even before the stock market opened, sent Wall Street soaring as relieved investors celebrated the Fed’s tacit acknowledgment that it had made a mistake last week in playing down concerns over the spreading distress in the credit markets. After falling for six straight days, the Dow Jones industrial average shot up 233.30 points, to 13,079.08, a 1.8 percent increase.
The Fed, while not yet cutting a rate that wields more influence over the economy, moved to stimulate lending in part because it recognized that even well-to-do families with good credit ratings were having difficulty getting mortgages. That problem, radiating through the housing market and then the broader economy, had “the potential to restrain economic growth,” the Fed said.
The sudden action also suggested that the nation’s central bankers were worried that a major financial institution might be at risk of failure if the Fed did not move before its policy makers gather for their next regular meeting, on Sept. 18.
Analysts predicted that the Fed was likely to go further, cutting market interest rates soon, perhaps even before its meeting next month if its action yesterday does not help to shore up confidence on Wall Street and elsewhere in the economy.
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