In Surprise Move, Fed Cuts Key Rate

nytimes
Jeremy W. Peters, Vikas Bajaj

Traders at the Bombay Stock Exchange today. The slump in Asian markets continued today before the Fed move was announced. (Foto: Gautam Singh/Associated Press)

The The Federal Reserve today approved a half-percentage point cut in its discount rate on loans to banks, saying that it now feels that “tighter credit and increased uncertainty have the potential to restrain economic growth going forward.” Stocks immediately surged when trading opened.

move is a significant change for the Fed, which just a few weeks ago left its benchmark short-term interest rates unchanged, citing continued concern about inflation, and it signals that policy makers may be prepared to cut interest rates more quickly than earlier thought.

The Fed announcement came about an hour before the markets opened on Wall Street. Within minutes of the opening bell, the Dow Jones industrial average soared 300 points. At 10 a.m., it was up 200 points, or 1.5 percent, while the other two main indexes were up slightly more.

The discount rate at which the Fed lends money to banks it considers creditworthy was lowered to 5.75 percent, from 6.25 percent. That rate is still higher than the benchmark overnight lending rate between banks of 5.25 percent.

“In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably,” the Fed said in a statement. “The committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”

The cut in the rate applied to banks that seek funds at the so-called discount window of the Fed appears meant to assure banks that may be having trouble raising money from one another or the capital markets that the Fed will do everything in its power to make sure there is plenty of cash available and at low rates.

In recent weeks, few banks have turned to the discount window. For the week ended Wednesday, the Fed only lent $11 million a day at the primary credit rate, up from $1 million the week before. The central bank releases data on discount lending every Thursday afternoon.

Market experts said the Fed’s decision allows it, for now, to avoid taking the highly unusual step of lowering the federal funds rate between scheduled meetings so it can determine just how serious the damage to the economy is.

In a report today, ING Financial Markets said: “This opens the door to cuts of the Fed funds rate itself, should this be deemed necessary. There is still a possibility of an inter-meeting cut, or a cut at the Sept. 18 meeting, though of course, if markets respond favorably, this may be viewed as unnecessary.”