At its regularly scheduled March 18 meeting, the Federal Reserve Board’s Federal Open Market Committee voted to cut both the Fed Funds target rate and the Discount rate by 75 basis points each, to a Fed Funds rate of 2.25%, and a Discount rate of 2.50%. It was widely anticipated that the Fed would cut its target for Fed Funds rates at this meeting.
The Discount Rate had been cut Sunday, March 16, by 25 basis points, to 3.25%, in an extraordinary response to the collapse of Bear Stearns and sale of that firm to JPMorgan Chase on the 16th. Coupled with today’s additional 75 basis point cut in the Discount rate means that the Fed has cut the discount rate by a full point in the last three days.
Not all Fed governors agreed to this action; the vote was eight to two, with “Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting,” the Fed reported in a statement, voting against cuts this steep.
Although the Fed asserts that it is still concerned about inflation, in the March 18 announcement it stated: “Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.”
During the current financial crisis the Fed has become much more overtly active, creating new lending facilities for primary dealers, including both depository banking institutions and broker/dealers, allowing a much broader spectrum of primary dealers’ assets to be pledged as collateral, and lengthening the terms for loans from the Discount window, in an effort to mitigate liquidity and solvency issues that may be faced by some broker/dealers and banks.