Fed rate cut: Reaction function

Has the Fed come to the rescue of beleaguered financial markets? That was the first interpretation investors gave to the announcement that the US central bank was cutting its discount rate by half a percentage point, from 6.25% to 5.75%. Equity markets jumped by 2-3% and the Itraxx crossover credit spread index narrowed by 55bps. But the rejoicing may prove premature. The discount window allows cash-strapped banks to borrow what they need at a punitive interest rate. The Fed has cut the penalty...