Smith Faculty Opinion Article	August 20, 2007
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

Comment on Fed Cuts Discount Rate

Cutting the discount rate makes a bigger statement than cutting the federal funds rate, which the Fed has implicitly already done. This should give markets a lift today but will it stick on Monday and Tuesday? If not, we are in much bigger trouble than economists have conceded so far.

The subprime mortgage problem has shaken financial markets much further than warranted by the actual dollar volume of at risk mortgages. Fundamental confidence in financial markets, and in particular the institutions that create these markets, has been damaged. The Federal Reserve's move today is partially intended to address that psychological issue. If markets fail to respond positively today and hold those gains through next week, the economy will be in a crisis of confidence that is truly threatening to our prosperity.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission. ►More Faculty Opinion Articles