The Federal Reserve slashed U.S. interest rates by a hefty three-quarters of a percentage point on Tuesday, giving a lift to stock markets already jubilant over stronger-than-expected investment bank earnings.
Trying to avert a deep recession and financial market meltdown, the central bank cut less than many traders had expected but left the door open to additional reductions.
Two policy-makers voted against the move for fear of fueling inflation, underscoring the tough balancing act the Fed faces with prices rising on the back of a boom in commodities and energy costs.
"The Fed has shown that they are focused on getting the economy back on its feet first and foremost, and they will worry about inflation later," said K. Daniel Libby, senior portfolio manager at Sands Brothers Select Access Fund in Greenwich, Connecticut.
The move, which took overnight rates down to a three-year low of 2.25 percent, came after a host of emergency measures to breathe life into financial markets that the Fed hadn't used since the 1930s. Fed Chairman Ben Bernanke, a student of the Great Depression, on Sunday unexpectedly allowed direct Fed lending to securities firms and helped put together a rescue to keep Wall Street firm Bear Stearns from going under.
Stocks, already up on news that key Wall Street players Goldman Sachs Group Inc <GS.N> and Lehman Brothers Holdings Inc <LEH.N> were in better shape than thought, extended their gains. In the end, the Dow Jones industrial average <.DJI> jumped 420 points, or 3.5 percent.
The battered dollar recorded its largest single-day increase against the yen in nine years and rallied against the euro, while safe-haven U.S. Treasuries fell as investors regained confidence and poured into stocks.
"The Fed's action is yet another forceful move in its attempts to alleviate the liquidity crunch and to shore up a rapidly weakening economy," said Arun Raha, a senior economist with Swiss Re in New York.
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