TOPICS > Economy

Federal Reserve Cuts Key Interest Rate

BY Admin  March 18, 2008 at 4:20 PM EDT

Federal Reserve Chairman Ben Bernanke; File photo

The latest action brought the federal funds rate — the interest that banks charge each other — down to 2.25 percent, the lowest point since late 2004. The reduction in the funds rate is also designed to lower borrowing costs and boost consumer and business spending.

“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 central bank said in a statement outlining its decision.

The Federal Reserve has now cut the funds rate six times since September. The reductions have become more aggressive since January as the central bank faces the growing turmoil in global financial markets.

In Jacksonville, Fla., President Bush said Tuesday the government will take enact other measures — if necessary — to help the sagging economy.

“[I]f there needs to be further action we’ll take it — in a way that does not damage the long-term health of our economy,” the president said, adding it will take time to work through the housing and mortgage crisis.

On Wall Street, U.S. stocks rallied after the news of the rate cut and solid results from two top investment banks, Goldman Sachs & Co. and Lehman Brothers Inc. For the broader market, it was the biggest one-day advance in more than five years.

The Dow Jones industrials have shot up about 420 points, according to preliminary calculations from Reuters. The Standard & Poor’s 500 Index unofficially finished up 54.14 points, or 4.24 percent, at 1,330.74 — a rise that marked its biggest one-day advance since October 2002. The Nasdaq Composite Index racked up its biggest one-day surge since March 2003, unofficially ending up 91.25 points, or 4.19 percent, at 2,268.26.

The funds rate cut also triggered announcements from commercial banks that they were cutting their prime lending rate — the benchmark for millions of business and consumer loans — to 5.25 percent from 6 percent, where it was before the Fed meeting.

The rate cut caps an unprecedented period of Fed actions aimed at trying to stabilize financial markets and ward off a recession or at least keep it from being too severe, most notably coordinating the bailout of lending giant Bear Stearns over the weekend.

The bailout was the latest in a number of unconventional moves the central bank has made, including employing Great Depression-era procedures to pump cash into the financial system.

In addition to providing support for the Bear Stearns sale, the Fed also announced Sunday one of the broadest expansions of its lending authority since the 1930s, saying it would allow securities dealers to borrow directly from the Fed for at least the next six months — a privilege previously enjoyed only by commercial banks.