The central bank cuts its key rate to 4.75% in a move to prevent a deep housing slump from turning into a recession. Stocks, especially financial stocks, soar in reaction.
The stock market enjoyed one of its biggest days of the year today after the Federal Reserve delighted investors with a larger-than-expected cut in its key interest rate.
The Dow Jones industrials soared nearly 336 points, or 2.5%, to 13,739 -- its biggest point and percentage gains of the year. The point gain was the biggest since Oct. 1, 2002. The Standard & Poor's 500 Index jumped 43 points, or 2.9%, to 1,518, its best percentage gain since Aug. 1, and the Nasdaq Composite Index soared 70 points, or 2.7%, to nearly 2,652.
At the same time, however, consumers won't be happy with energy prices. Crude oil closed at $81.51 a barrel in New York, a record closing price, and was above $82 in after-hours trading this afternoon.
The huge rally came after the Fed cut its federal funds rate from 5.25% to 4.75% in a bid to keep the softening economy from sliding into recession. The federal funds rate is what banks charge each other for overnight loans and is the basis for everything from business loans to credit card charges.
The Fed also cut its discount rate -- the rate it charges member banks and institutions for short-term loans -- from 5.25% to 4.75%.
Stocks shot higher in response within seconds of the Fed's 2:15 p.m. ET announcement.
"The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally," the Fed's statement on its decision said. "Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."
Most Fed watchers had expected a smaller cut in the fed funds rate to 5% and 5.5% on the discount rate.
Hmm, the economic at us so bad? What do you think? Let's see how stock market performs today :)
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