2) They cut the Discount Rate (the rate that banks can borrow from the Fed)

3) They cut the Federal Funds rate (the rate that banks borrow from each other)

The Fed is basically trying to avoid two things (a) Adjustable rate mortgages which would shift from low teaser rates to higher rates could cause payment shocks and hence cause the subprime borrowers to default on payments. The Fed has tried to partly tackle this by lowering the interest rates. This also indicates that the Fed’s worries about a recession currently outweigh their concerns about inflation.

(b) The banks which have sponsored various complex vehicles are themselves finding liquidity in markets as a problem. This is tackled by lowering the discount rate and allowing greater liquidity

However, it is still early to say whether these measures will be enough..

Somsram

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