For the first time in four years, amid concern that the economy could be constrained by tightening credit conditions, members of the U.S. Federal Reserve meeting on Monday decided to cut the Fed funds rate by 50 basis points to 4.75 percent, giving stocks a strong boost.
A statement released by the Fed's Federal Open Market Committee at 2:15 PM EST said the move to cut Fed funds rate, the rate at which banks make overnight loans to each other was a preventative action amid growing uncertainty.
Financial markets reacted positively to the news as stock indexes surged. Major Indexes were up about 2 percent by 2:54 PM. The Dow Jones Industrial average rose 248.01 points, or 1.85 percent to 13,651.43 The technology heavy Nasdaq rose 52.17 points, or 2.02 percent to 2,663.83 points. The broader S&P 500 was up 31.33 points, or 2.12 percent to 1,507.98.
"Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook," the Fed said.
"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."
In contrast to previous statements where inflation was the primary factor in keeping interest rates steady, the Fed only mentioned that "some inflation risks remain," adding that it would continue to monitor situation carefully.
The Fed also decided to cut its discount rate, the rate at which it offers short term loans to financial institutions, by 50 basis points to 5.25 percent. The Fed said requests to do so had been submitted to several of its branches located in Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City and San Francisco.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.