17/12/2008 - 06:50

Wall Street surges after Fed rate cut

17/12/2008 - 06:50


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US stocks soared on Tuesday as investors cheered the Federal Reserve decision to cut its key rate to near zero and its pledge of more steps to revive economic activity.

US stocks soared on Tuesday as investors cheered the Federal Reserve decision to cut its key rate to near zero and its pledge of more steps to revive economic activity.

The Dow Jones Industrial Average leapt 362.32 points (4.23 per cent) to 8,926.85 at the closing bell.

The Nasdaq jumped 81.55 points (5.41 per cent) to 1,589.89 and the Standard & Poor's 500 broad-market index vaulted 44.69 points (5.15 per cent) to a preliminary close of 913.26.

Gains accelerated after the Fed slashed its base lending rate to virtually zero while pledging to take further actions to get credit flowing and revive an economy in the worst recession in decades.

The central bank's Federal Open Market Committee lowered its target federal funds rate from 1.0 per cent, already at a historic low, to a range of zero to 0.25 per cent.

The US dollar slumped while stocks and bonds rallied on the announcement.

"Today's Fed actions have been forceful and effective," said Brian Bethune, economist at IHS Global Insight.

"They are fully congruent with chairman Ben Bernanke's pronouncement in October that the Fed would not 'stand down' until the battle against the current economic and credit crisis is won - indeed, this is exactly the decisive leadership and action that the American public is looking for to pull the economy out of its current tailspin."

The Federal Reserve has cut its target for a key interest rate to the lowest level on record and pledged to use "all available tools" to combat a severe financial crisis and prolonged recession.

The central bank on Tuesday said it had reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25 per cent. That is down from the 1 per cent target rate in effect since the last meeting in October. Many analysts had expected the Fed to make a smaller cut to 0.5 per cent.

The Fed's aggressive move was greeted enthusiastically by Wall Street. The Dow Jones industrial average rose more than 250 points in late-afternoon trading.

The Fed's action and statement made clear that economic conditions have worsened since its last meeting in October.

Federal Reserve Chairman Ben Bernanke and his colleagues said they will use unconventional methods to try to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century. For example, the Fed last month said it planned to purchase up to $US600 billion ($A898.88 billion) in direct debt and mortgage-backed securities issued by big financial players including Fannie Mae and Freddie Mac in an effort to boost the availability of mortgage loans.

That move was one of a series the central bank has taken to increase its loans by hundreds of billions of dollars as a way to deal with the worst financial crisis to hit the US in more than 70 years.

The Fed on Tuesday also made clear that it intends to keep the funds rate at extremely low levels.

"The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," the central bank's panel that sets interest rates said in a statement.

Even before the announcement of a lower target, the funds rate has been trading well below the old target of 1 per cent. For November, the funds rate had averaged 0.39 per cent. Analysts said it was likely to fall further with the Fed setting the new target as low as zero.

The Fed's decision is expected to be quickly matched by a reduction in banks' prime lending rate, the benchmark rate for millions of business and consumer loans. Before the Fed announcement, the prime rate stood at 4 per cent.

The Fed has never pushed its target for the federal funds rate as low as zero to 0.25 per cent. The lowest target rate before had been 1 per cent, a level seen only once before in the past half-century.

Given how low interest rates are, the central bank said it planned to use a variety of unconventional methods to flood the banking system with credit and drive interest rates lower.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.

The announcement on the deployment of unconventional methods had been expected given that Bernanke and other Fed officials have sought in recent comments to let financial markets know that the central bank will not be out of ammunition to battle the economic downturn even with the funds rate at such low levels.

In its statement Tuesday, the Fed said that since its last meeting in late October, "labour market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined. Financial markets remain quite strained and credit conditions tight."

The central bank acknowledged that it had room to battle the economic weakness because inflation pressures have "diminished appreciably" as the price of energy and other commodities has fallen sharply.

The Fed action came only hours after the government announced that consumer prices dropped by a record amount of 1.7 per cent in November, reflecting a record decline in the price of petrol and other energy products.


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