The Federal Reserve surprised the stock markets today, cutting short-term interest rates 50 basis points. The cut puts the federal funds rate at 4.5%, the lowest since August 1994. In a statement, the Fed noted the erosion in corporate profits and a rising uncertainty about the business outlook made the economy "unacceptably weak,” so "an adjustment in the stance of policy is warranted” before its next policy-setting meeting May 15.
The markets responded with huge gains. The Dow Jones industrial average closed up 398.91, or 3.89%, at 10,615.64; the S&P 500 rose 46.38, or 3.89%, closing at 1,238.19; and the Nasdaq composite was up 156.41, or 8.13%, to close at 2,079.63. All numbers are preliminary.
The Fed’s action has resulted in a steeper yield curve, with long-term interest rates not dropping that much, suggesting the economy is near its bottom, said Casey Colton, vice president and a senior fixed-income portfolio manager at American Century. "There’s a suggested belief that business activity will pick up” in the second half of the year, he said.
