Prometheus 6

Markets Soar After Fed Cuts Key Rate by a Half Point
By EDMUND L. ANDREWS and JEREMY W. PETERS

WASHINGTON, Sept. 18 — The Federal Reserve today lowered its benchmark interest rate by a half point, a forceful policy shift intended to limit the damage to the economy from the recent disorder in the housing and credit markets.

While an interest rate cut was widely expected, there had been profound uncertainty about whether the Fed would choose a more cautious quarter-point reduction. But the bolder action and an accompanying statement, both approved by a unanimous vote of the central bank’s policy-setting committee, made it clear that the Fed had decided the risks of a recession were too big to ignore.

“Developments in financial markets since the committee’s last regular meeting have increased the uncertainty surrounding the economic outlook,” the central bank said. Signaling that it might cut rates more if necessary in months ahead, it said it would “continue to assess” the economic outlook and “act as needed to foster price stability and sustainable economic growth.”

The decision, which reset the overnight lending rate between banks to 4.75 percent, was the Fed’s first rate cut in four years.

Stocks immediately soared. The Dow Jones industrial average registered its biggest one-day gain in almost five years, closing at 13,739.39, up 335.97, or 2.5 percent. The Standard & Poor’s 500-stock index rose nearly 3 percent.

For consumers, the Fed’s move could mean lower borrowing costs on for mortgages and automobile loans. But the impact may be muted, because investors remain deeply anxious about the credit quality of mortgages and other long-term loans. The main problem in the past month has not been high rates so much as the availability of capital to complete deals.

In a separate move to bolster the banking system, the Fed also said today that it had cut its discount lending rate, which applies to short-term emergency loans to banks, to 5.25 percent — also a half-point cut.

This was the Federal Reserve’s most abrupt reversal of course since January 2001, when it suddenly slashed rates at an unscheduled emergency meeting because of signs that the economy was slipping into a recession. The last half-point cut in the federal funds rate came in November 2002.