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Fed Slices Discount Rate to Promote Growth

[Aug 24, 2007.]


The Federal Reserve Board took bold action this week in cutting its discount rate on loans to banks by a half of a percentage point.

The move came amidst worries that difficult economic conditions could hinder business growth in the U.S. A worldwide credit crisis has caused turmoil in financial markets, raising the specter of recession.

As a result of the Fed's decision, the discount rate will drop to 5.75%, down from 6.25%. However, the federal funds rate remains unchanged at 5.25%, as it has for the past year. Still, if the financial markets fall into a tailspin, the Fed may opt to slash the federal funds rate too. A number of economists have been calling for such a move in the interest of national economic security. Such forces as the current housing crisis, tightening credit, and consumer confidence troubles threaten to converge, leading to recession.

Federal Reserve Chairman Ben Bernanke issued a statement in which he said that, while the economy is growing, "the downside risks to growth have increased appreciably." The Fed is "monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

The Fed also stated that "financial market conditions have deteriorated and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."

In response, White House Deputy Press Secretary Tony Fratto stated, "We have full confidence in the Federal Reserve on these issues and respect their independence."

Economic concerns have been heightened by what's happening on Wall Street. While the Dow Jones Industrial average set a record of 14,000.41 a month ago, the Dow has lost more than 1100 points in a series of triple-digit losses in recent days. Economists hope the Fed's recent actions will lead to a turnaround at the New York Stock Exchange as investor confidence rises.

Julie Ann Amos
August 24th 2007

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