The Federal Reserve slashed a key U.S. interest rate by three-quarters of a percentage point Tuesday, a substantial cut but smaller than many in financial markets had expected, as part of an effort to hold off a deep recession and financial meltdown.
The Fed's action takes the bellwether federal funds rate to 2.25 percent, the lowest since February 2005, and comes two days after the central bank announced the latest in a series of
emergency measures to stem a fast-spreading global financial crisis. Many in financial markets had expected the Fed to chop the overnight rate by a full point.
The Fed has now cut rates by 3 percentage points since mid-September, including 2 points since the start of the year.
In recent days, the central bank has also unveiled steps not used since the Great Depression to ensure financial institutions have access to liquid funds.
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Read how stock were up earlier on the day in anticipation of the Fed's move. The WSJ reports:
Stocks jumped Tuesday as investors focused on the Federal Reserve's role in remedying the ailments of Wall Street and the overall economy, possibly with an unusually sharp cut in its key interest-rate target.
Also, a round of better-than-expected results from top investment banks buoyed the financial sector, a key bellwether for the broader market.
The Dow Jones Industrial Average was up 219.00 points, or 1.8%, at 12191.25. The Nasdaq Composite Index gained 1.8%, or 39.91 points, at 2216.92.
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Read about how the fed rate cuts may be helping the economy, but not the credit crisis. As CNBC reports:
It's not the economy, stupid.
It's the credit crunch.
The size of the Federal Reserve's expected interest rate cut this afternoon may help stimulate a sluggish economy. But like the several cuts before, it is unlikely to unfreeze the credit markets, especially the mortgage one.
And as the Fed continues to use its conventional fire-fighting equipment,there's a growing sense that extraordinary--and somewhat controversial--measures may be needed.
"The Fed by itself will not get us out of it," says John Irons, research director at the Economic Policy Institute. "We need to combine fiscal stimulus with monetary stimulus."
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