The Federal Reserve cut a key interest rate again today:
WASHINGTON — The Federal Reserve reduced its benchmark interest rate by three-quarters of a percentage point on Tuesday, to 2.25 percent, a cut that was less than investors had been hoping for even though it was one of the deepest in Fed history.
While leaving the door open for additional rate cuts, policy makers also expressed growing concern about inflation. “Uncertainty about the inflation outlook has increased,” the central bank said. “It will be necessary to continue to monitor inflation developments carefully.”
The statement highlighted the growing problem that the Fed faces, between fighting an economic downturn and heading off new inflationary pressures that have become apparent in everything from energy and food prices to the falling value of the dollar.
In a sign of the difficult choices the Fed faces, 2 of the 10 members of the policy-making Federal Open Market Committee dissented from the decision, favoring a smaller rate cut.
The two dissenters in Tuesday’s decision were Richard W. Fisher, president of the Dallas Fed, and Charles I. Plosser, president of the Philadelphia Fed, both of whom have been outspokenly hawkish about inflation issues in recent months.
The Fed’s announcement was the culmination of an extraordinary series of actions over the last two weeks to prop up financial markets and the economy with a flood of cheaper money.
In response, the stock market, which had been doing well all day, soared by more than 400 points:
Casting aside any hesitation about an aggressive interest rate cut, investors sent stock markets soaring to their highest gains in a week on Tuesday as shares of financial firms surged in the hopes that the Federal Reserve has finally taken hold of the credit crisis. The Dow Jones industrial average gained more than 400 points.
The surge began at the opening bell after two big investment banks, Lehman Brothers and Goldman Sachs, delivered stronger earnings than expected. It faltered only briefly after the Fed’s announcement in the afternoon, with the Dow tacking on 250 points in the final hour and a half.
At the close, the Dow was at 12,392.66, a gain of 420.41, or 3.5 percent. The Standard & Poor’s 500-stock index and the Nasdaq composite each advanced more than 4 percent.
The rally capped a week of extraordinary efforts on the part of the central bank to restore confidence to financial markets in the wake of the de facto collapse of Bear Stearns, one of Wall Street’s most venerable investment banks. The three-quarter point cut amounted to a strong dose of financial adrenaline, though some investors had expected an even deeper cut.
Enough ? Or just a sugar pill ? My bet is on No. 2.
