Fed cuts rate for loans to banks

The discount rate cut was approved by the Fed’s board, which controls this rate. However the policy statement was approved unanimously by the Federal Open Market Committee, the larger group of Fed board members in Washington and Fed regional bank presidents who set the federal funds rate.

Economists saw that as a significant signal that the Fed stood ready to cut the funds rate, which has been at 5.25 percent since June 2006 when the Fed ended a two-year rate tightening campaign aimed at slowing economic growth enough to keep inflation under control.

The discount rate covers only loans that the Fed makes directly to banks. By moving it to 5.75 percent, the Fed put it closer to the funds rate. The central bank also announced other technical changes to make it easier for banks to get discount loans, such as extending the time the credit will be supplied to up to 30 days.

The nation’s once high-flying housing market has been sinking deeper into gloom, and credit, the economy’s lifeblood, is drying up. Many economists believe these problems, including declining consumer confidence, could lead to a recession.

Since setting a record close of 14,000.41 just a month ago, the Dow Jones industrial average has shed 1,154.63 points in a string of triple-digit losing days that have raised anxiety levels not just on Wall Street but on Main Street as well.

The markets have been pummeled by a rapidly spreading credit crisis that began with rising defaults in subprime mortgages — home loans made to people with weak credit histories. Now the problems are spreading to other borrowers.

Countrywide Financial Corp., the nation’s largest mortgage banker, was forced to borrow $11.5 billion Thursday so it could keep making home loans. It was a move that rattled investors who have watched a number of smaller mortgage companies go under because of credit problems.

The shockwaves have extended to giant Wall Street investment firms such as Goldman Sachs, which announced earlier this week that it was pumping $2 billion into one of its struggling hedge funds and was asking other investors put to put in another $1 billion. BNP Paribas, France’s largest bank, last week froze three funds that had invested in the troubled U.S. mortgage market.

The Fed and other central banks already had infused the banking system with billions of dollars in an effort to keep short-term interest rates from surging and making credit even more difficult to obtain.

However, those billions did not calm investors worried about which big hedge fund or mortgage company will be the next to announce serious problems. For that reason, investors have become fearful to supply money through credit markets to companies even if they have strong credit records.

MORE FROM STOCKS & ECONOMY

Stocks & economy Section Front

Fed to weigh on minds of investors this week   Price of gas drops, but not by very much Saudi oil minister says oil is at ‘perfect’ price Obama talks of jobs plan in weekly address Unexpected drop in jobless rate fuels optimism A deeper look behind the jobless numbers Factory orders rise an unexpected 0.6 percent Stocks advance as employers cut fewer jobs theGrio: Black teens' unemployment rate spikes Obama sees some consensus at job summit Stocks & economy Section Front   Add Stocks & economy headlines to your news reader: