The Federal Reserve Open Market Committee went the extra mile Tuesday, cutting both the overnight federal funds rate, the target interest charged by banks of one another for overnight loans, and the discount rate, the percentage charged by the Fed for direct loans to banks, by 50 basis points each. The move sent the stock markets soaring, with the Dow Jones Industrial Average shooting up more than 300 points on the news.
The Fed moves comes as welcome news in the home building industry since both rates directly affect the interest rates on mortgages. The half-percentage-point drop in the rates, to 4.75% and 5.25% respectively, should translate directly into reductions in rates on mortgages and could significantly lessen the impact of ARM resets that are due to trigger over the next several months.
In a statement, the FOMC said that though it remained concerned over inflation, "the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action 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 FOMC, which voted unanimously for the rate cuts, also said, "Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully."
The FOMC statement continued, "Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."
That last statement was taken by some on Wall Street as a signal that the Fed stands ready to cut rates again if economic conditions continue to deteriorate. However, others cautioned that the specter of inflation could make this a "one and done" rate cut.