Fed Cuts Bank-to-Bank Rate to Calm Markets

This interest rate is the one the Fed charges to make direct loans to banks. It lowered this "discount window" rate from 6.25 percent to 5.75 percent, ABC News reported.

The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year.

"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward," the Fed said in a statement Friday.

"Although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably."

Stocks surged this morning after the news from the Fed. In the first minutes of trading, the Dow jumped up 300 points and the NASDAQ was up more than 65 points.

Many investors on Wall Street have been calling for the Fed and its relatively new chairman, Ben Bernanke, to take some type of action.

Others have warned that it is not the Fed's role to bail out overzealous investors who made poor decisions and that any cut by the central simply rewards those risk takers and undermines the overall market.

Last week, the Fed infused more money into the lending markets in an attempt to calm fears over housing and credit problems.

But that was not enough — this week has seen the market continue its bumpy fall.

Thursday, the Dow Jones industrial average plunged more than 340 points early in the day only to see a late-afternoon rally, closing the day down less than 16 points.

If the market fall continues, some say the Fed might be forced to cut its federal funds rate, which directly impacts consumer lending. Such a cut would mean lower interest rates for mortgages, credit cards and would make it easier for corporations to borrow.

The Fed signaled that it would take further action if it is needed.

"The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets," the Fed said in its statement.

The Fed is expected to next decide what to do with that key federal funds rate on Sept. 18. But today's statement shows that it might be willing to meet sooner.

The decision to change one rate but not the other means that the Fed believes the market problems are being cause by the availability of cash, not the rate at which people borrow money.

The markets have been on a wild ride in the last month. July started with a bang with the Dow quickly climbing, closing July 19 at a new record close: 14,000.41.