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The Federal Reserve slashed a key interest
rate by three-quarters of a point Tuesday, capping its most
aggressive two months of action in a quarter-century in a battle to
halt a spreading credit crisis. Wall Street loved it, bursting to
its biggest gain in five years.

      The strong Fed action seemed to convince investors, at least for
now, that the central bank will do whatever it can to keep the
country out of a steep recession. The Dow Jones industrial average
finished the day up 420.41 points at 12,392.66.

      The latest Fed move brought the federal funds rate - the
interest that banks charge each other - 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 rate by three-fourths of a
percentage point twice this year. The first occurred at an
emergency meeting on Jan. 22 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.

      Fed Chairman Ben Bernanke and his colleagues have now cut the
funds rate six times since last September, with the reductions
becoming more aggressive since January as the central bank has
faced growing turmoil in global financial markets.

      The Fed also announced Tuesday that it was reducing its discount
rate for banks by a similar three-quarters of a point, pushing it
down to 2.5 percent. That cut, which followed a quarter-point
reduction 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."

      Many analysts said they believed the Fed may cut rates only once
more, perhaps by a more ordinary quarter-point at the next meeting,
and then sit back and see if economic stimulus checks that will
begin arriving at 130 million households in May will do the trick
along with the rate cuts to jump-start the economy.

      There was opposition to Tuesday's decision, which was approved
on an 8-2 vote. Richard Fisher, president of the Dallas Fed
regional bank, and Charles Plosser, president of the Philadelphia
regional bank, both dissented, preferring less aggressive moves. It
marked the first time there have been as many as two dissents since
the fall of 2002.

      However, there has been no apparent change in the stance of
Bernanke and the majority of Fed members that at the moment the
greatest threat to the economy is from a possible recession, which
may have already started, rather than from inflation that might be
kindled by low rates.

      "The Fed's statement signaled that the risks still are very
much on the downside and they are willing to do whatever is
necessary to make sure the economy doesn't slide away," said Mark
Zandi, chief economist at Moody's Economy.com.

      In explaining its actions, the Fed said that it was having to
navigate a difficult policy environment that included sluggish
economic activity and rising inflation pressures. It said anew that
it was prepared to take further actions.

      "Financial markets remain under considerable stress and the
tightening of credit conditions and the deepening of the housing
contraction are likely to weigh on economic growth over the next
few quarters," the Fed said in its statement.

      In Jacksonville, Fla., Tuesday, President Bush said the
government will take further action - if necessary - to help the
sagging economy.

      The spectacular fall of Bear Stearns has raised concerns about
what other banks might fail as a result of multibillion-dollar
losses that began last year with rising defaults on subprime
mortgages, loans made to borrowers with weak credit histories.
However, two investment banks, Lehman Brothers Inc. and Goldman
Sachs Group Inc. reported better than expected first quarter
results on Tuesday, easing market worries.

      Stocks had already been up strongly Tuesday before the Fed
action. After the interest-rate cut was announced, stock prices
slid lower as investors digested the fine print, then the buying
resumed in earnest.

      The purchase of Bear Stearns by JPMorgan Chase & Co. was helped
by a pledge from the Fed that it would supply a $30 billion line of
credit to back up Bear Stearns' assets.

      That offer was the latest in a number of unconventional moves
the central bank has made, including employing Depression-era
procedures to pump cash into the financial system.

      In addition to providing support for the Bear Stearns sale, the
Fed also announced Sunday one of the broadest expansions of its
lending authority since the 1930s, saying it would allow securities
dealers for at least the next six months to borrow directly from
the Fed. That privilege had been confined to commercial banks.

      In other moves, the Fed last week announced that it would lend
up to $200 billion of Treasury securities that it owns to
investment banks starting March 27 for a period of up to 28 days in
return for a like amount of the investment banks' shunned
mortgage-backed securities. The Fed also announced recently that it
was boosting the size of special loans it has been making since
December to commercial banks.

Gallery

Business and Economic News

The Federal Reserve slashed a key interest
rate by three-quarters of a point Tuesday, capping its most
aggressive two months of action in a quarter-century in a battle to
halt a spreading credit crisis. Wall Street loved it, bursting to
its biggest gain in five years.


Wall Street leaps on Fed cut, bank gains

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