Federal Reserve cuts the discount rate, but federal funds rate remains unchanged.

In what some call a surprise move, the Federal Reserve cut its discount rate 50 basis points (or half a percent) to 5.75% this morning.

While this has no impact on the interest rate consumers pay for home loans, it does help to increase confidence in the overall financial markets.

According to the Wall Street Journal, cutting the discount rate while leaving the federal funds rate alone "suggests that for now it believes the problems in the markets are mostly related to the availability of cash, not the price of cash". Financial analysts expect that the Feds will follow with a similar cut in the federal funds rate by their next meeting on September 18.

CNNMoney says that "The discount rate, the rate the Federal Reserve charges qualified lenders, mainly banks, for temporary loans, is largely symbolic." The discount rate does not affect the rates that consumers pay for credit cards, home equity lines of credit, car loans and other consumer loan rates. The federal funds rate affects these, and remains at 5.25%.

Although some say that this cut was largely symbolic, David Wyss, chief economist with Standard & Poor’s, said "This is an important move. It’s not just a symbolic action. The Fed is telling banks that the discount window is open. Take what you need". Wyss also stated that the cuts "could help convince banks it was okay to keep lending to companies or consumers that actually are creditworthy".

While some are slamming the Fed for bailing out the larger lending institutions while letting the smaller ones go out of businesses, Wyss’ opinion is that "If you enjoy cutting off your nose every time you have a cold, then not cutting rates would be a good strategy. There are a lot of people who have this puritanical view that everyone should be punished, but the Fed’s job is to worry about the whole economy. It has to make sure that rest of the economy doesn’t suffer. What the Fed did today has nothing to do with bailing out banks. If you were going to lose money on a bad mortgage you will still lose money."

Fortune’s senior editor Allan Sloan takes a different point of view, saying that "Wall Street loves to talk about letting financial markets weed out the weak. But when the Street itself gets in trouble, it sticks out its little tin cup, asking for help. And gets it." Sloan’s article slams the Fed’s tactics, stating that "The subprime-mortgage-market meltdown is a classic example of the way small fry get devoured, but the whales of Wall Street get rescued."

Sloan takes a very cynical view of the whole subprime issue, saying that "Wall Street enabled this mess in the first place. How so? By happily sucking up hundreds of billions of dollars’ worth of suspect mortgages from marginal U.S. borrowers - and begging mortgage makers to create more of them. The Street sliced and diced this financial toxic waste into a variety of esoteric securities, making a nice markup when it sold them and generating a continuing stream of profits when it made markets in them."

While it’s clear that many of the loans that are currently in trouble are the cash-out refi’s that were pushed to the max by overstated appraisals, it’s hard to say just how many loans, refi’s or otherwise, are affected by shady lending practices. There are plenty of Santa Clarita homeowners who were qualified for loans based on intro rates that later skyrocketed, and now find themselves upside down on their mortgages with little relief in sight.

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