December 11, 2007

Breaking : Fed cuts Discount, Funds rate 25 bps

Statement:

US financial prospects continue to decline as a result of fallout from the mortgage industry. Concerns are biased toward inflation (which is why the cut was only 25 bps). The US economy overall continues to be strong despite the problems in the financial sector.

The surprising thing is that the discount rate (the Fed to bank lending rate) was only cut 25 bps and not more. The real problem in financial services right now is the lack of liquidity on banks' balance sheets as most of the majors have been forced to move mortgage assets from level one to level three capital. A cut in the discount rate would have allowed banks to leverage off the Fed's balance sheet with oversight. Which would have freed up liquidity and helped liquefy the market.

Posted by mcblogger at December 11, 2007 01:16 PM

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