WASHINGTON — The Federal Reserve slashed a key interest rate by three-quarters of a percentage point Tuesday, capping its most aggressive two months of action in a quarter-century in a battle to halt a spreading credit crisis. Wall Street loved it, bursting to its biggest gain in five years.
The strong Fed action seemed to convince investors, at least for now, that the central bank will do whatever it can to keep the country out of a steep recession. The Dow Jones industrial average finished the day up 420.41 points at 12,392.66.
The latest Fed move brought the federal funds rate — what banks charge each other — down to 2.25 percent, the lowest level since late 2004.
The reduction triggered announcements from commercial banks that they were cutting their prime lending rate to 5.25 percent from 6 percent.
This rate is the benchmark for millions of business and consumer loans.
“We had been on the brink of the biggest financial meltdown this country had ever seen, but I think the Fed has now turned the psychology around,” said David Jones, chief economist at DMJ Advisors. “The Fed is saying it is ready to supply all the emergency credit (that) banks need to get us out of this crisis.”
The Fed action aims to lower borrowing costs and boost spending by consumers and businesses and thus increase economic activity. Economic growth slowed to a near standstill in the final three months of 2007 as the nation was hit by a series of blows including the credit crunch, a prolonged housing slump, rising unemployment and surging energy prices.
The Federal Reserve has cut its rate by three-fourths of a percentage point twice this year, first at an emergency meeting on Jan. 22, followed by a half-point cut at a regular meeting Jan. 30. The three cuts in two months represent the most aggressive Fed credit-easing since mid-1982 when the Paul Volcker-led Fed was working to get the U.S. out of a deep recession.
Fed Chairman Ben Bernanke and his colleagues have now cut the funds rate six times since September, with the reductions becoming more aggressive since January as the central bank has faced growing turmoil in global financial markets.
