The Federal Reserve lowered its key Funds Rate by 0.75%. Most had expected a full 1% cut, but markets rallied, with the Dow posting a 420-point gain on the day.

The Fed has been very busy lately. In addition to backing JP Morgan’s buyout of Bear Stearns, the central bank has allowed securities broker dealers to access Federal Reserve lending through the discount rate. Traditionally reserved for banks only, the move is an unprecedented attempt to prevent what happened at Bear Stearns from happening with other brokers.

What happened at Bear Stearns, according to CEO Alan Schwarz, was similar to a classic bank run. The firm simply did not have the cash to continue honoring redemptions and withdrawals at the rate they were happening.
The Fed’s move to back brokers in similar straits is a risky one for the central bank, as it’s putting up its own assets and, should there be a run on banks, it might be a run on the Fed.

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