WASHINGTON — The Federal Reserve gave borrowers a rate-cut present for the holidays. Wall Street's response: Bah humbug!
Fed Chairman Ben Bernanke and all but one of his colleagues agreed Tuesday to trim the central bank's key interest rate by a quarter percentage point to 4.25 percent, leaving the federal funds rate at a nearly two-year low. The action is aimed at preventing a housing and credit meltdown from pushing the economy into recession.
Wall Street, though, thought the Fed was being stingy; some investors were hoping for a half-percentage-point cut.
The Dow Jones industrial average plunged 294.26 points to close at 13,432.77. The Standard & Poor's 500 index lost 38.31, or 2.53 percent, to 1,477.65. The Nasdaq composite index fell 66.60, or 2.45 percent, to 2,652.35.
"This seems to have disappointed some on Wall Street who were looking for a little more in their Christmas stockings this year from Santa Bernanke," said Scott Anderson, an economist at Wells Fargo Economics.
The rate reduction, the third this year, was needed to energize national economic growth, Fed officials said in announcing the cut. The deepening housing slump is affecting the behavior of consumers and businesses alike, they said.
"Economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks," the Fed said. The three rate cuts ordered thus far "should help promote moderate growth over time."
The Fed left the door open to additional rate cuts, and many economists predicted that the Fed will be forced to continue lowering the fed funds rate in the coming months.
The federal funds rate — charged on overnight loans to each other by the Fed's member banks — affects many other interest rates charged to individuals and businesses and is the Fed's most potent tool for influencing economic activity.
In response, commercial banks, including Wachovia and Wells Fargo, lowered their prime lending rates by a corresponding amount to 7.25 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans.
High oil prices could complicate the Fed's job of trying to keep the economy expanding and inflation low.
"Elevated energy and commodity prices, among other factors, may put upward pressure on inflation," the Fed said. "Inflation risks remain," it continued, adding that it "will continue to monitor inflation developments carefully."
The fact that the Fed's key rate was lowered again marked an about-face for the central bank. At its previous meeting in October, Fed officials hinted that their two rate cuts probably would be sufficient to help the economy survive the housing and credit stresses.
Since then, however, financial conditions have deteriorated, prompting Bernanke to signal before Tuesday's meeting that another rate cut might be needed after all as an insurance policy against undue economic weakness.
As another bolstering move, the Fed on
Tuesday also lowered the discount rate, its lending rates to banks, by one-quarter percentage point to 4.75 percent.
It was the fourth cut in the discount rate since mid-August.
The 9-1 decision for a quarter-point reduction in the funds rate was opposed by Eric Rosengren, president of the Federal Reserve Bank of Boston, who preferred a half-percentage-point cut.