WASHINGTON (AP) — The Federal Reserve moved Thursday for a second time in just over two weeks to protect the U.S. economy from a spreading global crisis, cutting two key interest rates by a quarter-point. The surprise cuts ignited an explosive rally on Wall Street.
The Dow Jones industrial average ended the day up 331 points, its third biggest point gain in history. Bond prices soared as well.
Banks responded immediately by cutting their prime lending rates, the benchmark rate for millions of business and consumer loans, such as home equity loans. The prime rate was reduced by a quarter-point to 8 percent, its lowest level in four years.
Thursday’s cut, less than three weeks before the congressional election, marked the first time in four years the central bank has changed interest rates between regular meetings of its policy-setting Federal Open Market Committee.
The Fed announced it was reducing its target for the federal funds rate, the interest that banks charge each other on overnight loans, to 5 percent from 5.25 percent. It cut its discount rate, the interest the Fed charges to make loans directly to banks, by a quarter point to 4.75 percent.
The central bank moved on Sept. 29 to cut the funds rate by a quarter point, its first interest rate reduction in nearly three years.
The September move sent stock prices plunging because disappointed investors feared Federal Reserve Chairman Alan Greenspan and his colleagues would be too tentative in their efforts to fight off a recession, repeating mistakes that brought on the country’s last recession in 1990.