A dose of penicillin or a shot of adrenaline? Investors interpreted the Federal Reserve’s surprise 50 basis point cut in its discount rate as the latter – US equities surged on Friday morning, with financial stocks leading the charge.

The discount rate is that at which banks borrow directly from the Fed (whereas the Fed funds rate is a target for inter-bank overnight lending rates). Since 2003, the discount rate has sat 100bp above the Fed funds rate (after Friday’s cut the spread is 50bp). That higher cost, plus the stigma that use of the “discount window” has drawn historically, means banks use it as a last resort. RBS Greenwich Capital points out that discount window borrowing has been minimal during the turmoil.

On that basis, the cut is all about utilising other techniques to try to make money flow. Repeated open-market injections of short-term liquidity do not work when banks are hoarding cash. Barclays Capital highlights the widening gap between overnight lending rates and three-month rates as evidence of this. The reason? Countrywide’s struggle has raised the frightening prospect of multiple credit lines – contingent liabilities offered by banks to many clients almost as a courtesy – being drawn down all at once, inflating banks’ balance sheets uncontrollably.

Hence, the Fed is reiterating its watchfulness and emphasising that it accepts a wider range of assets, including home mortgages, as collateral in the discount window compared with open-market operations. That reduces the chance of an immediate emergency Fed funds cut. Indeed, until there is more clarity on the extent of the structured credit problem, it is not clear how much help such a cut would provide. Ben Bernanke, Fed chairman, has not capitulated – note that the discount rate spread was not erased entirely. He has, however, given ground and, in spite of Friday’s slight downward move, Fed funds futures still imply investors expect one or more cuts by the end of the year.