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Last Updated: Friday, 17 August 2007, 12:33 GMT 13:33 UK
Fed cuts rate to stabilise market
Federal Reserve chairman Ben Bernanke
Fed chairman Ben Bernanke has a difficult balancing act
The US Federal Reserve has cut its primary discount rate, which is the rate at which it lends money to banks, from 6.25% to 5.75%.

The surprise cut is meant to help deal with credit problems which have been destabilising stock markets.

"These changes are designed to provide depositories with greater assurance about the cost and availability funding," a Fed statement said.

It is a different rate to the federal funds rate, which remains at 5.25%.

The Federal Funds rate determines the level of interest rates for consumers.

The move is intended to boost the amount of money available in the financial system and make it easier for banks to borrow money from each other.

Tighter credit conditions and increased uncertainty have the potential to restrain economic growth
US Federal Reserve Open Markets Committee

That should ease the credit crunch which has been driven by the fear that there are unknown debt problems due to exposure to sub-prime lending.

The news has had a dramatic effect on stock markets worldwide, with the London FTSE rising by nearly 200 points or more than 3%.

Surprise move

It is highly unusual for the US central bank to change interest rates in-between its regular, six-weekly meetings.
This is an unusual move in unusual times
Robert MacIntosh, chief economist, Eaton Vance.

The last time it made such a move - also cutting the Federal Funds rate - was after 11 September, 2001, when financial markets were closed.

In a statement, the Fed said that there was a danger that the financial crisis could lead to slower economic growth.
Newly built house in Connecticut
The housing slump has created credit problems for banks

"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward," the Fed's Federal Open Markets Committee said in a unanimous statement.

In earlier statements, the Fed had warned that there was still a danger of inflation, suggesting that it would be reluctant to cut the federal funds rate.

Economists said that the move on Friday would help boost the stock market.

"This is an unusual move in unusual times," said Robert MacIntosh, chief economist at Eaton Vance.

"It tells you that they felt they needed to grease the interbank system and this is one way to do it. I'm pleased they did not change Fed Funds rate. It shows they are still serious about fighting inflation. This will probably help everyone."

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