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Fed Approves Cut in Discount Loan Rate

The Federal Reserve approved a half-percentage point cut in its discount rate on loans to banks Friday, a dramatic move designed to stabilize financial markets roiled by a widening credit crisis.

The action had an immediate positive impact on Wall Street after weeks of losses. The Dow Jones industrial average initially shot up more than 300 points right after the opening bell. By early afternoon, stocks had given up some of the initial gains but the Dow was still up by more than 200 points.

The decision means that the discount rate, the interest rate that the Fed charges to make direct loans to banks, will be lowered to 5.75 percent, down from 6.25 percent.

The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year but it sent a strong signal in the wording of its statement that it was prepared to cut that rate as well.

It did that by dropping any reference to inflation, which was the worry that had kept it from cutting the federal funds rate, and instead stated "that the downside risks to growth have increased appreciably."

Many economists said the move from an emphasis on inflation worries to an emphasis on worries about economic growth is the precursor to an actual cut in rates, probably at the next regular Fed meeting on Sept. 18.