The Explanation of the Fed Rate Cut.

In Fed action, the Federal Reserve acknowledged the
impact of the credit crunch as they temporarily cut
the Discount Rate by 0.50 today to 5.750%.

The Discount Rate is the rate at which the Fed lends
money directly to banks, credit unions, savings and loans
and large lenders.

The Federal Reserve left the Fed Funds rate unchanged
which is the rate charged to banks for overnight loans.
Typically, the Discount Rate is 1.00% above the Fed Funds Rate which makes it more desirable to borrow from Banks rather then the Fed.

The current liquidity crisis has made this difficult so
what the Fed has done by lowering the Discount Rate is made more liquidity available at a reduced rate.

Additionally, the Fed has extended the borrowing period to
30 days from overnight and this will be renewable by the
borrower. This allows lenders to use the discount window
for 30 days before selling into the secondary market.
Hopefully within this time, the credit markets will calm
and buyers of mortgage backed securities will come back to
the table.