The Federal Reserve Open Market Committee, citing a heightened concern with inflation, on Tuesday afternoon cut the Federal Funds Rate by 75 basis points to 2.25%, a quarter point less than Wall Street was expecting.
The Fed governors also cut the discount rate, the interest charged banks and now investment houses for short term loans, by 75 basis points to 2.50%.
The Fed indicated in its statement that the deteriorating economy remained its chief concern. "Recent information indicates that the outlook for economic activity has weakened further," said the statement. "Growth in consumer spending has slowed and labor markets have softened. 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."
But in the very next paragraph, the governors said, "Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully."
Wall Street seemed to take the news in stride, losing about 100 points off what had been a near-300 point gain in the Dow Jones Industrial Average earlier in the day. The Dow recovered, however, and was trading at highs for the day, up 302 points, or 2.5%, shortly after 3 p.m. The S&P home builder exchange traded fund was up 8.2% to $21.04 after having been up nearly 9% earlier in the day.
The market was apparently reacting to a paragraph in the Fed statement that said, "Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability." That last sentence was taken as evidence that the Fed stands ready to make futher cuts if necessary.
The vote was not unanimous. Voting against were Fed Governors Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action, according to the statement.