Fed Cuts Discount Rate to 5.75%

Washington, DC, August 17, 2007--The Fed, in an unscheduled announcement, cut its discount rate and said it's prepared to take further actions to ``mitigate'' damage to the economy from the rout in global credit markets.

The central bank reduced the rate at which it makes direct loans to banks by 0.5% to 5.75%. Policy makers kept their benchmark federal funds rate target unchanged at 5.25%. It's the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman.

``Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward,'' the central bank's Federal Open Market Committee said in a statement released in Washington. ``The downside risks have increased appreciably.''

In the statement, the committee said it is ``prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets.''

The cut reflects alarm at the central bank that more restrictive lending conditions and volatility in financial markets will deepen the housing recession, weaken employment and erode economic growth. As recently as its Aug. 7 meeting, the FOMC kept rates unchanged and said inflation is still the biggest danger to the economy.

The Fed noted then that ``financial markets have been volatile,'' though the economy was still expected to continue to expand at a ``moderate'' pace.