Stock prices took their biggest jump in more than five years Tuesday after the Federal Reserve cut interest rates by a dramatic three-quarters of a percentage point and suggested more cuts could be coming.
In an 8-2 vote, Fed policymakers cut their target for short-term rates to 2.25%, the lowest in more than three years. The cut matched the most aggressive move since they began targeting the rate in 1990. The Fed has cut the rate from 5.25% since September.
Investors cheered. The Dow Jones industrial average rose 420 points, or 3.5%, the biggest point gain since July 2002.
President Bush, in a speech in Jacksonville, said the economy is in a "challenging time," but said the government had acted swiftly to aid struggling homeowners in passing a stimulus plan in February.
"If there needs to be further action, we'll take it," he said.
Fed Chairman Ben Bernanke and his colleagues said in a statement: "The outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress." They raised concerns about inflation, saying price pressures should ease, but that "uncertainty"
Still, the Fed repeated that it is concerned about the economy and said it will "act in a timely manner as needed," language suggesting more rate cuts could come.
But Carnegie Mellon professor and Fed historian Allan Meltzer says the Fed is taking too big an inflation risk by cutting rates so low. Fed policy "is a repeat of the mistakes of the 1970s," he says.
The presidents of the Fed banks in Dallas and Philadelphia dissented, favoring a less drastic cut. There hadn't been two dissents at one meeting since September 2002.
The Fed's cut is good news for borrowers, but bad for savers.
Lenders cut the prime rate, the benchmark for many home-equity loans. Credit card rates should fall over the next few months. Those with adjustable-rate mortgages resetting soon will also benefit. Yet amid massive write-downs, banks have been slower to pass along rate cuts and have raised fees. And for savers, returns from conservative investments will continue to fall.
