As is often the case, the rumor mill was wrong but included a kernel of truth.
Rather than an emergency, intermeeting fed fund rate cut, as was widely speculated Thursday, the Federal Reserve Friday cut its less heralded discount rate, the short-term rate at which the Fed lends to banks and other depository institutions, a more measured step initially applauded by Wall Street's frazzled denizens.
But the debate over whether the Fed needs to do more persists, and the stock market's initial embrace of the Fed action ( at least they're doing something) dissipated by midmorning.
Cutting the discount rate "appears to be Bernanke's attempt to thread the needle," writes Joseph Brusuelas, chief U.S. economist at IDEAglobal.The needle that the Fed chairman and his cohorts are trying to thread is to craft a response to what is currently a financial markets (vs. "real economy") crisis without either reinflating the animal spirits that caused problems with leveraged bets in the first place or losing their inflation-fighting credentials. By taking a tough line at its Aug. 7 policy meeting, despite high-profile problems at two Bear Stearns (BSC) hedge funds and the implosion of mortgage lenders such as American Home Mortgage (AHM), the Fed seemed to be turning a deaf ear to cries for relief. But rather than bailing out speculators, as some critics contend, the Fed on Friday was responding specifically to evidence of problems in the commercial paper market, typically obscure but crucial short-term debt.