Federal Reserve policy-makers today lowered the federal funds rate target by 75 basis points to 2.25% and the discount rate to 2.5%, also by 75 basis points. Recent information indicates that the outlook for economic activity has weakened further, said a statement by the Federal Open Market Committee, which set the federal funds rate target. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.
The statement also said that inflation has been elevated, and some indicators of inflation expectations have risen. But the committee expects inflation to moderate in coming quarters. Todays policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity, the statement said.
The markets soared on the news, with the Dow Jones industrial average closing up 420.41, or 3.51%, at 12,392.66; the S&P 500 rose 54.05, or 4.19%, closing at 1,330.71 and the Nasdaq composite was up 91.25, or 4.24%, to close at 2,268.26. All numbers are preliminary.
The Fed has cut the overnight interbank lending rate six times since Sept. 18, 2007, bringing the benchmark rate to 2.25% from 5.25%. The Fed has also cut the discount rate, which it charges on loans to banks, eight times since Aug. 17, 2007, to 2.5% from 6.25%.
Its very good, said Dan Fuss, vice chairman of Loomis Sayles, adding that while some had been hoping that the Fed would provide a 100 basis-point cut in the federal funds rate, the 75 basis-point reduction made a little more sense.
This is helping the U.S. dollar stabilize in general, Mr. Fuss said. This Fed move is helping to bring some stability to the banking system and to the currency markets.