New York – A jubilant Wall Street barreled higher Tuesday after the Federal Reserve cut its benchmark interest rate by a larger-than-expected half percentage point. The Dow Jones industrial average reacted by surging 335 points – its biggest one-day point jump in nearly five years.
Although some investors hoped for a rate cut of that magnitude, most were betting on a quarter-point cut in the federal funds rate. The Fed responded to the spilling of credit-market problems into the rest of the economy by saying, “The tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally.”
The Fed lowered the benchmark fed funds rate to 4.75 percent after keeping it unchanged for more than a year and not lowering the rate since 2003. It also reduced the discount rate – what it charges banks borrowing from its discount window – by a half percentage point to 5.25 percent. On Aug. 17, the central bank lowered the discount rate by a half-point to help keep cash moving in the banking system.
The central bank’s decision and the wording of its accompanying economic assessment gratified a market that had plunged during August amid fears that credit-market tightness, spawned by a continuum of mortgage defaults and delinquencies, would send the economy toward recession.
The Dow soared 335.97, or 2.51 percent, to 13,739.39.
The Standard & Poor’s 500 index rose 43.13, or 2.92 percent, to 1,519.78. The Nasdaq composite index gained 70.00, or 2.71 percent, to 2,651.66. The S&P and the Nasdaq had their largest point gains since July 29, 2002.
