Fed Cuts Key Interest Rate .75%

March 18, 2008 — -- Wall Street bounced back today with a massive rally thanks to better-than-expected earnings reports from brokerages Goldman Sachs and Lehman Brothers and then another rate cut by the Federal Reserve.

The Dow Jones Industrial Average closed up 420 points, the NASDAQ up 91 points and the Standard & Poor's 500 was up 54 points.

Shares of Goldman closed up 16 percent and Lehman Brothers saw a whopping 43 percent increase in its share price today.

While it was the earnings reports that started the rally this morning, a three-quarters of a percentage point rate cut this afternoon by the Fed pushed the markets even higher.

The deep cut -- one in a series of recent cuts -- is aimed at trying to avoid a prolonged recession.

After today's move, the key Federal Funds rate now stands at 2.25 percent, down from 5.25 percent in the summer. Since August, the Federal Reserve and chairman Ben Bernanke have cut the rate five times. The last time interest rates were this low was February 2005.

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"Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened," the Fed said in a statement. "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."

"Inflation has been elevated, and some indicators of inflation expectations have risen," the Fed continued. "The committee expects inflation to moderate in coming quarters, reflecting a projected leveling out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully."

Wall Street initially did not like the move by the Fed. Stocks had been trading up all morning thanks to better-than-expected earnings reports from Wall Street brokerages Goldman Sachs and Lehman Brothers.

The Dow Jones industrial average was up 285 points before the 2:15 p.m. announcement. Within 15 minutes of the news, the Dow Jones Industrial Average was up just 125 points. But that quickly changed. Just an hour after the announcement, stocks were at new highs for the day, with the Dow up 330 points. At the end of the day, the Dow closed up a more than 400 points.

This morning U.S. Treasury Secretary Henry Paulson stopped short of saying the country was in a recession, but acknowledged "the economy is in sharp decline."

"The label they put on it is much less important to me than what we do about it," Paulson said on "Good Morning America" today. "The American people feel the slowdown and we feel the slowdown."

Washington policymakers have been struggling for months with how to deal with a mortgage and credit crisis that is now expanding to the greater economy.

Some critics have questioned why the government is using taxpayer dollars to bail out Wall Street titans, like Bear Stearns, while thousands of Americans struggle to stave off housing foreclosure and receive nothing.

According to the National Community Reinvestment Coalition, corporations have received $230 billion in federal aid compared to nothing for homeowners. But Paulson said the government is trying to help individual Americans, too.

"We also are working very hard on this mortgage foreclosure problem to avoid foreclosures that are affordable," he said. "We're focused on making this work."

He pointed to the stimulus package Congress and the president approved. Starting May 2, 130 million Americans are expected to get checks which the government hopes they will spend at stores.