Fed cuts discount rate half a point, stocks rally
WASHINGTON -- The Federal Reserve early Friday announced a surprise half-percentage-point cut in the discount rate — what it charges banks for short-term loans — saying deteriorating market conditions threaten economic growth.
Stocks in Europe and the USA rallied on the news.
"The statement is having the desired immediate effect of boosting the stock market ... and is designed to get credit markets to re-engage in bidding for higher risk assets," said Stuart Hoffman of PNC Bank.
A statement accompanying the discount rate announcement also appeared to increase the chance of a cut in the more important federal funds rate. The Fed has held its target for the fed funds rate at 5.25% for more than a year. The Fed has held its target for the fed funds rate, the central bank's main tool for managing the economy, at 5.25% for more than a year — including an August 7 meeting at which it called inflation the predominant threat to the economy.
Since hitting a record close of 14,000.41 a month ago, the Dow Jones industrial average had shed 1,154.63 points in a string of triple-digit losing days that raised anxiety levels not just on Wall Street but also on Main Street.
The markets have been pummeled by a rapidly spreading credit crisis that began with rising defaults in subprime mortgages — home loans made to people with weak credit histories. The problems have disrupted a slew of financial deals and have made it tougher for people with good credit to get mortgage loans, further deepening an already steep housing recession.
Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward," the Fed said Friday, in language that indicates a future rate cut is more likely.
"In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the (Fed) judges that the downside risks to growth have increased appreciably," the central bank said.
