Stocks Soar On Fed's Half-Point Rate Cut

A jubilant Wall Street barreled higher Wednesday after the Federal Reserve cut its benchmark interest rate by a larger-than-expected half a percentage point. The Dow Jones industrial average surged more than 330 points after the Fed announced 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.

Although some investors hoped for a rate cut of that magnitude, most were betting on a smaller, quarter-point cut in the federal funds rate. The Fed responded to the spreading impact of credit market problems on the rest of the economy by saying, "the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally."

The Fed cut the benchmark fed funds rate after keeping it unchanged for more than a year. It has not lowered this rate since 2003. It also reduced the discount rate - what it charges banks borrowing from its discount window - by half a percentage point to 5.25 percent. On Aug. 17, the central bank lowered the discount rate by a half-point to help keep cash moving in the U.S. banking system.

The central bank's decision and the wording of its accompanying economic assessment gratified a market that plunged during August amid fears that credit market tightness, spawned by a continuum of mortgage defaults and delinquencies, would send the economy toward recession.

"I think we'll need a series of cuts to insure this economy doesn't unravel in to recession," Moody's Economy.com's Mark Zandi told CBS News correspondent Anthony Mason.

Brian Bethune, an economist at Global Insight, agrees that this will not be the last rate cut of the year, "The Fed has rolled out the heavy artillery here", he said. "Bernanke is not being timid. The Fed has seen the problems. It is not trying to put out a forest fire with a bucket of water," he said.

He predicts that the central bank will lower rates again - probably by a more modest one-quarter percentage point - at its next meeting in October. Another rate reduction could come in December, the last meeting of this year, if the economy were to falter.

There was no direct signal in the Fed's statement that it would make further rate cuts. It said "some inflation risks remain" and that it will keep monitoring inflation developments. Still, it did not call inflation its "predominant policy concern" as it did after holding rates steady in early August.

"What it says to me is you had a major shift in the last couple of months from a Fed that was very concerned about inflation to one that is concerned about the health of the financial markets, the availability of liquidity," said Jerry Webman, chief economist at Oppenheimer Funds Inc.

The Dow soared 335.97, or 2.51 percent, to 13,739.39. The last time it rose more than 300 points in one session was Oct. 15, 2002, when it gained 378 points, and Tuesday's percent increase was the biggest since April 2, 2003. The blue-chip index is now only about 1.9 percent below its record close of 14,000.41, reached in mid-July.

The Fed's aggressive rate cut also prompted crude-oil futures to catapult even further into record terrain, rising 94 cents to $81.51 a barrel.

Though Wall Street's reaction to the rate cut was clearly positive, some analysts said the Fed's reaction to the summer's market tumult may eventually lead investors to worry more about how bad the current credit climate might be, and how vulnerable the U.S. economy is.

"The market's initial response is 'Thank you, Ben,'" Webman said. "But we also know that when people stop and look at this, people might say, 'Could this house of cards be shaky, more than even we thought it was?"'

A CBS News Poll out today show that for the first time since 2001, a majority of Americans, 51 percent, say the economy is getting worse. And Mason reported that there was another bad omen today when industry analyst RealtyTrac Inc. announced in its monthly report that foreclosures were up 115 percent from a year ago.

These factors could add up to trouble for the consumer - though the Fed tends to measure inflation with volatile food and energy prices stripped out, these high commodity costs trickle down to average Americans and can dampen their spending power.

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.

Analysts believe the Fed has room to cut rates even further 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.

Many analysts had predicted that Bernanke, who has been cautious since taking over as Fed chairman, would opt for a quarter-point move, the change in rates usually preferred by Greenspan.

But with this action, Bernanke appeared to be trying to surprise financial markets with a positive change after disappointing investors following the Aug. 7 meeting when he and fellow board members refused to change rates and still said inflation was the biggest threat facing the economy.

"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 Fed said in a brief statement explaining its actions.

Private forecasters said that worry is not misplaced, given that all but two of the housing downturns that have occurred since the end of World War II have been accompanied by recessions.

"You get as big a decline in housing as we are looking at and that is serious business," said Lyle Gramley, a former Fed governor and now an analyst at Stanford Financial Group in Washington. "I think we will escape a recession, but just by the skin of our teeth."

Economists said they believed that Bernanke, who wrote extensively as an economics professor on the Great Depression that followed the 1929 stock market crash, understands what needs to be done to avert downturns.

"We have had a long history of financial panics and if we have learned anything, it is that you shove money at them," said David Wyss, chief economist at Standard & Poor's in New York.

While some have complained that Bernanke has been more tentative than Greenspan would have been, no less an authority than Greenspan disagrees.

Doing a round of interviews to promote his new book, Greenspan, who was Fed chairman for 18½ years, said Bernanke was "doing an excellent job" and he doubted that he would have done anything differently.

Greenspan told The Associated Press that the odds of a recession have grown since earlier this year, even though "the economy is not doing badly at this stage."

He put the odds of a recession at greater than one in three. "But best I can judge it is less than 50 percent," he said.

Greenspan's one-in-three prediction earlier this year rocked Wall Street.