Fed Cuts Key Interest Rate By Half-Point

(CBS/AP)  The Federal Reserve cut a key interest rate for the first time in four years, seeking with an aggressive half-point move to prevent a steep housing slump and turbulent financial markets from triggering a recession.

The Fed announced Tuesday that it was reducing its target for the federal funds rate, the interest that banks charge each other, from 5.25 percent to 4.75 percent. The half-point reduction was double the quarter-point move that many economists had been expecting.

The action was designed to boost economic growth by lowering borrowing costs for millions of consumers and businesses. Commercial banks were expected to quickly match the Fed's action by cutting their prime lending rate. The prime rate has been at 8.25 percent for the past 15 months.

A jubilant Wall Street barreled higher Tuesday after the Federal Reserve announcement. The Dow Jones industrial average was up more than 250 points shortly after the Fed announced its move.

Wall Street's focus today was on the central bank's decision on rates and the accompanying economic statement. The slumping housing sector, tightening credit market and stock market volatility have all given investors reason to believe monetary policy is in need of some loosening.

Most in the market were expecting at least a quarter percentage point cut in the benchmark federal funds rate, given last month's decline in jobs and weakening retail sales.

Today's decision is Fed Chairman Ben Bernanke first major test since taking over from Alan Greenspan in early 2006. He has been sending signals that he is prepared "to act as needed" to cushion the impact on the economy from the market turmoil.

Most economists were predicting that Bernanke and his colleagues would choose to reduce the federal funds rate only by a quarter point although a few economists saw the chance for the bolder half-point move. But analysts agreed that whatever the Fed decided would likely not be the last word on the subject.

Many economists are predicting a string of three or more rate cuts as the central bank works to calm financial markets and keep the worst slump in housing in 16 years from pushing the country into a recession.

"We have a very soft economy and if the Fed doesn't lower rates then the economy could fall into a recession," said Mark Zandi, chief economist at Economy.com.

Zandi has trimmed his forecast to show economic growth of around 2.5 percent in the current quarter, down sharply from 4 percent growth in the April-June quarter. He said the fourth quarter is likely to be even weaker at around 1.5 percent.

Analysts believe the Fed has room to cut rates because inflation pressures have been easing. In good news on that front, the Labor Department reported Tuesday that wholesale prices fell by 1.4 percent in August. It was the biggest drop in 10 months and much larger than the 0.3 percent fall that had been expected.

Oil futures jumped to new records Tuesday as traders bet that a Federal Reserve interest rate cut could stimulate economic growth and increase demand at a time when crude oil and gasoline inventories are tight.

Oil investors had been pricing a quarter-point decrease into the market, part of the reason oil futures have surged to new records in recent days, said Brad Samples, a commodities analyst at Summit Energy Services Inc. in Louisville, Kentucky. A half-point cut could spur even more buying, he said.

"The whole market is kind of poised on the brink, waiting to see what the Fed will do," Samples said.

Light, sweet crude for October delivery rose 82 cents to $81.39 a barrel on the New York Mercantile Exchange after fluctuating between gains and losses and then rising to a record $81.80 earlier.

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