Fed reduces discount rate

The Fed controls two interest rates: the discount rate, which is the rate the Fed charges commercial banks for loans from the Fed (actually there are two rates, the primary credit rate and the secondary credit rate); and the federal funds rate, which is the rate on loans between commercial banks. Today the Fed reduced the primary credit rate and accompanied this move with a public statement:

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

Two comments: (1) this action suggests other members of the FOMC view the economic situation in a far different light than Bill Poole (see post from yesterday). (2) in the week ending Wednesday banks borrowed only $11 million from the Fed's primary credit facility - a drop in the bucket (by contrast, the Fed has added tens of billions of dollars to reserves through open market operations in the last week). This suggests that the discount rate move, rather than having any large practical effect, is intended as a strong signal that the Fed will cut the federal funds rate dramatically when it next meets in September. Based on the federal funds futures markets, market participants have been expecting a quarter point cut in September. I'm guessing now that the cut will be half a point.