Fed cuts key rates three-quarters of a point

updated 7:39 p.m. ET March 18, 2008

WASHINGTON - Ben Bernanke’s Federal Reserve is proving it’s not afraid to move aggressively.

Criticized for being too tentative after the credit crisis first erupted last August, Chairman Bernanke and his central bank colleagues have significantly picked up the pace since the turn of the year. They have delivered a series of hefty interest rate cuts and taken other unprecedented actions to supply money to cash-strapped financial institutions.

The Fed on Tuesday slashed a key interest rate by three-quarters of a point, wrapping up its most aggressive two months of rate cuts in a quarter-century.

The strong action certainly boosted spirits on Wall Street, pushing the Dow Jones industrial average up by 420.41 points in its biggest one-day point gain in five years. Investors took heart that the central bank will do whatever it can to keep the country out of a recession.

The latest Fed move brought the federal funds rate — the interest that banks charge each other — down to 2.25 percent, the lowest since late 2004.

Video   Wall Street’s great divide March 18: Reviews of what the Federal Reserve should do, and how much danger the economy is in, are decidedly mixed. CNBC’s Michelle Caruso-Cabrera reports. CNBC

That’s important far beyond bank boardrooms. The reduction triggered announcements from commercial banks that they were cutting their prime lending rate to 5.25 percent from 6 percent. This rate is the benchmark for millions of business and consumer loans.

The Fed action was designed to lower borrowing costs and boost spending by consumers and businesses and thus increase economic activity. Economic growth slowed to a near standstill in the final three months of last year as the nation was hit by a series of blows including the credit crunch, a prolonged housing slump, rising unemployment and surging energy prices.

The Federal Reserve has now cut its funds rate by three-fourths of a percentage point twice this year. The first occurred on Jan. 22 after an emergency meeting and was followed by a half-point cut at a regular meeting on Jan. 30. The three rate cuts over the course of two months represent the most aggressive Fed credit easing since mid-1982 when the Paul Volcker-led Fed was working to get the country out of a deep recession.

Bernanke and his colleagues have now cut the funds rate six times since last September, with the reductions becoming more aggressive since January as the central bank has faced growing turmoil in global financial markets.

The Fed also announced Tuesday that it was reducing its discount rate, the interest it charges to make direct loans to banks, by a similar three-quarters of a point, pushing this rate down to 2.5 percent.

That cut, which followed a quarter-point reduction in the discount rate on Sunday, was seen as a clear signal that the Fed is ready to supply significant amounts of credit in direct loans to banks and other institutions through its discount window in an effort to stabilize financial markets roiled by the collapse over the weekend of Bear Stearns, the nation’s fifth largest investment bank.

“We had been on the brink of the biggest financial meltdown this country had ever seen, but I think the Fed has now turned the psychology around,” said David Jones, chief economist at DMJ Advisors. “The Fed is saying it is ready to supply all the emergency credit banks need to get us out of this crisis.”

Many analysts said they believed the Fed may cut rates only once more, perhaps by a more ordinary quarter-point at the next meeting, and then sit back and see if economic stimulus checks that will begin arriving at 130 million households in May will do the trick along with the rate cuts to jump-start the economy.

There was opposition to Tuesday’s decision, which was approved on an 8-2 vote. Richard Fisher, president of the Dallas Fed regional bank, and Charles Plosser, president of the Philadelphia regional bank, both dissented, preferring less aggressive moves. It marked the first time there have been as many as two dissents since a September 2002 meeting.

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