In an effort to save the economy from recession, the US Federal Reserve on Tuesday decided to lower its target for the federal funds rate by 75 basis points to 2.25%. The rate cut however stood below the market expectation of 100 basis points reduction. The markets in US pared gains slightly from over 2% to near 1.5%.
Dow Jones industrial average climbed 184.72 points, or 1.54%, to trade at 12,156.97, while NASDAQ composite index rose 32.85 points, or 1.51%, to trade at 2,209.86. S&P 500 index went up 24.68 points, or 1.93%, to trade at 1,301.28.
Announcing the rate cut, the Federal Open Market Committee (FOMC) said the recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remained 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.
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, it added.
Further the FOMC said that today`s policy action, combined with those taken earlier, including measures to foster market liquidity, should help 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.