The Federal Reserve cut their discount rate by half a point late last week, from 6.25% to 5.75%. The discount rate is the rate at which the Fed will loan directly to banks. They did not change the federal funds rate, which is the rate banks will lend to each other. This rate sits at 5.25% and is what prime (8.25%) is based on.
By lowering the discount rate, the Fed has tried in another way to infuse the lending industry with more liquidity. The Fed had already pumped billions of dollars into the banking system in the past two weeks. The rate drop came as a bit of a surprise, however, as there has not been a rate change between meeting dates since the week after September 11th 2001.
Their next meeting is scheduled for September 18th, and there is increased speculation that they will lower the federal funds rate. In a statement accompanying the rate decrease last week, the Fed indicated that they were now more concerned with adverse effects of market instability over their fears of inflation. This is a clear shift from their statement at their last meeting on August 7th.