Federal Reserve policy-makers today lowered the federal funds rate target by 50 basis points to 4.75%. In a related action, the policy-makers also cut the discount rate by 50 basis points to 5.25%.
U.S. markets responded to the news with huge gains. The Dow Jones industrial average closed up 335.64, or 2.5%, at 13,739.06; the S&P 500 rose 43.06, or 2.92%, closing at 1,519.71; and the Nasdaq composite was up 70.00, or 2.71%, to close at 2,651.66. All numbers are preliminary.
Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally, said a statement by the Federal Open Market Committee, which set the federal funds rate. Todays action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
The Fed has cut rates as sharply as anyone dared forecast, said Robert Brusca, chief economist at the independent research firm FAO Economics. Stock indexes jumped sharply and bond prices were beaten up as the 10-year note yield perked up above the 4.5% mark. The Fed simply decided that even with the inflation risk it needed to act on behalf of growth.
The Fed is doing this as insurance given the uncertainty about the outlook, said Dan Dektar, executive vice president and CIO of Smith Breeden Associates. Theyd rather be aggressive now and retract it later than risk falling behind.