Fed Cuts Discount Rate

Updated from 8:59 a.m. EDT

The Federal Reserve reduced the rate it charges banks who want to borrow from it, saying financial market conditions have deteriorated, and tighter credit and increased uncertainty have the potential to hinder economic growth.

By lowering the discount rate by 50 basis points Friday, rates will go to 5.75% from 6.25%.

With the cut, the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate is now 50 basis points. The fed funds rate, the rate banks use to charge each other interest on overnight loans, was unchanged at 5.25%.

Some investment banks, including Lehman Brothers (LEH Quote) and Goldman Sachs (GS Quote), are now expecting the Fed to lower the fed funds target.

The Fed has added billions of dollars in liquidity to the system in recent days, including $17 billion on Thursday, but it had yet to take any action on rates. Markets worldwide have slumped lately as worries about access to credit, stemming from a seize-up in the mortgage sector, have spread.

Names like Countrywide (CFC Quote), KKR Financial Holdings (KFN Quote) and Thornburg Mortgage (TMA Quote) are among the U.S. stocks that have been hit hard at least once this week as investors grew increasingly jittery about the companies' financial health.

Because of the current situation, "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."