The Federal Reserve approved a half-percentage point cut in its discount rate on loans to banks Friday, a dramatic move designed to stabilize financial markets roiled by a widening credit crisis.
The action had an immediate positive impact on Wall Street after weeks of losses. The Dow Jones industrial average initially shot up more than 300 points right after the opening bell and ended up 233 points for the day.
The decision means that the discount rate, the interest rate that the Fed charges to make direct loans to banks, will be lowered to 5.75 percent, down from 6.25 percent.
The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year. That rate greatly affects consumer interest rates because it’s tied to banks’ prime lending rates, the benchmark for millions of consumer and business loans.
However, the Fed has been infusing billions of dollars into the banking system over the past week to keep that rate from rising above the target level.
Economists praised the action by Federal Reserve Chairman Ben Bernanke and his colleagues, saying it should help steady jittery markets, although many expect a cut in the federal funds rate to follow.
“This is fine for temporary relief, but I think they will still have to cut the funds rate because the markets will still be turbulent,” said David Wyss, chief economist at Standard &Poor’s in New York.
Friday’s move was expected to help with a severe cash crunch facing many businesses, including mortgage companies, which are having trouble getting loans for short-term financing needs.
In a statement explaining the action, the Fed said that while incoming data suggest the economy is continuing to expand at a moderate pace, “the downside risks to growth have increased appreciably.”
White House deputy press secretary Tony Fratto declined to comment on the announcement but said, “We have full confidence in the Federal Reserve on these issues and respect their independence.”
The Fed said it was “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.”
Economists saw that as a significant signal that the Fed stood ready to cut the funds rate, which has been at 5.25 percent since June 2006, when the Fed wrapped up a two-year rate tightening campaign aimed at slowing economic growth enough to keep inflation under control.
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