Stocks soared but yields on 10-year Treasury note stayed stable after the Federal Reserve slashed 50 basis points off both the federal funds rate — the rate banks charge each other for overnight loans — and the discount rate, the rate the Fed charges for direct loans to banks.
The reduction in the target for the federal funds rate, to 4.75 percent, marked the first time the Fed had cut the overnight rate since June 25, 2003. At the time, the Fed was capping a series of reductions intended to encourage borrowing and stave off a recession after the dot-com stock market bust and the Sept. 11, 2001, terrorist attacks.
Before the Fed started cutting the federal funds rate on Jan. 3, 2001, it stood at 6.5 percent. A year and a half later, it stood at 1 percent.
Some analysts said the drastic reductions in the federal funds rate helped fuel the housing boom by easing lending standards.
The Fed then tried to put the brakes on growth by raising the federal funds rate 17 straight times between June 30, 2004, and June 29, 2006.
Just as the Fed was criticized for slashing the federal funds rate so drastically after the dot-com bust, some said it went too far in tightening monetary policy in an effort to keep inflation in check.
In a statement explaining today’s decision, the Fed’s Open Market Committee said economic growth was moderate during the first half of the year, but that “tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.”
Lowering the federal funds rate “is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”
The Federal Reserve’s Board of Governors also unanimously approved a 50-basis-point reduction in the discount rate, to 5.25 percent.
The Fed slashed the discount rate from 6.25 percent to 5.75 percent on Aug. 17, in part because mortgage lenders have been having trouble obtaining short-term funding.
The Fed acted after Countrywide Financial Corp. announced it had drawn down an $11.5 billion line of credit with 40 banks, and a Merrill Lynch & Co. analyst warned that the company could face bankruptcy if it was forced to sell of assets at bargain-basement prices.
The Fed said it would accept mortgage loans as collateral at the “discount window,” and extended the terms of what are ordinarily overnight loans to up to 30 days.
