fed rate cut

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Stocks roared back Tuesday in the biggest daily gains on Wall Street since July 2002 after the Federal Reserve cut its benchmark interest rate by three-quarters of a percentage point, but shadows still hover over the economy.
The Dow Jones Industrial Average shot up 420.41 points, or 3.5 percent, to 12,392.66. The S&P 500 rose 54.14 points to 1,330.74 and the Nasdaq was up 91.25 points to 2,268.26, both up more than 4 percent on the day.
Sustaining Tuesday's rally may prove challenging, however, especially given the Fed's explicit warning that expectations of inflation are rising.
The new warning on inflation, coming very high up in the Fed's statement, was a troubling reminder of how complicated the job has become for the guardian of the U.S. economy.
The Fed is wrestling with a housing-market disaster, and perhaps recession in the broader U.S. economy. Then, too, there are malfunctioning credit markets and investment banks that remain vulnerable to investor runs that could bankrupt them. Now inflation is back on the list of concerns, complicated by sky-high oil prices and a falling dollar.
''Inflation has been elevated, and some indicators of inflation expectations have risen,'' the Fed's Open Market Committee wrote in the third paragraph of its statement announcing two separate rate cuts.
Fed Chairman Ben Bernanke is an inflation hawk who has frequently warned that expectations about inflation are as important as inflation itself. That's because if businesses expect inflation - rising prices across the economy - they raise their own prices, helping to spur the problem.
The Fed's public focus on inflation expectations may be designed to bolster the U.S. dollar by alerting the world that the central bank is paying attention. The dollar's value has slid against major currencies as investors feared that the Fed was willing to tolerate rising inflation - which weakens the dollar's purchasing power - in order to boost the slumping U.S. economy.
President Bush, eager to reassure a rattled country, said Tuesday that his administration is ready to intervene again to stabilize the economy.
''If there needs to be further action, we'll take it, in a way that does not damage the long-term financial health of our economy,'' Bush said.
It was the second signal in two days from Bush about the possibility of more government action to help hurting consumers and a shaken financial market. Much of his agenda these days is meant to show he is engaged in fixing the economy but still confident in it.
Bush was not specific about other steps he might take.
The latest Fed move brought the federal funds rate - the interest that banks charge one another - down to 2.25 percent, the lowest since late 2004.
That's important far beyond bank boardrooms. 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.
The Fed action was designed 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 last year 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 now cut its funds rate by three-fourths of a percentage point twice this year. The first occurred on Jan. 22 after an emergency meeting and was followed by a half-point cut at a regular meeting on Jan. 30. The three rate cuts over the course of two months represent the most aggressive Fed credit easing since mid-1982 when the Paul Volcker-led Fed was working to get the country out of a deep recession.
The Fed also announced Tuesday that it was reducing its discount rate, the interest it charges to make direct loans to banks, by a similar three-quarters of a point, pushing this rate down to 2.5 percent.
That cut, which followed a quarter-point reduction in the discount rate on Sunday, was seen as a clear signal that the Fed is ready to supply significant amounts of credit in direct loans to banks and other institutions through its discount window in an effort to stabilize financial markets roiled by the collapse over the weekend of Bear Stearns, the nation's fifth largest investment bank.
''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 banks need to get us out of this crisis.''