As expected, the Federal Open Market Committee today lowered its target for the federal funds rate 50 basis points, to 3%. Most analysts expected the move, and stock market indexes shot up after the announcement was made at 2:15. The federal funds rate is the rate that banks charge each other for overnight loans of reserve balances, and is the most sensitive indicator of the direction of interest rates.
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," said the press release from the FOMC. "Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."
As part of its announcement, the Federal Reserve said it expects inflation to moderate in coming quarters but that it will keep a sharp eye out for any hints of inflation. As for future rate cuts, the Fed said it will remain flexible to act on future economic developments as they occur.
The markets expect another rate cut of 25 to 50 basis points at the Federal Reserve's next meeting in March.
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3.5%. The discount rate is the rate the Federal Reserve charges banks for temporary loans.