This week saw companies such as
KKR Financial Holdings
(TMA) and Canada's Coventree hit by
Major corporations, from Citigroup (C - Get Report) to General Electric (GE - Get Report) on down, use commercial paper to finance their operations, and the Fed is rightfully concerned that problems in that market would have serious economic implications, should they persist. This possibility prompted the Fed to acknowledge in Friday's statement that "downside risks to growth have increased appreciably."
"The explicit inclusion of risk to growth ... due to turmoil in financial markets is the key aspect of the action by the Fed
Surely, the Fed gave itself wiggle room Friday to cut the fed funds rate, the short-term target rate at which banks lend to other banks -- room it didn't seem to have after St. Louis Fed President William Poole's comments Wednesday that the Fed should not ease unless there was a financial "calamity."In addition to cutting the discount rate by 50 basis points to 5.75%, the Fed announced a change to the Reserve Banks' usual practices, to allow the provision of term financing for as long as 30 days instead of overnight. The changes will remain in place until the Fed determines that market liquidity "has improved materially," the statement reads.