WASHINGTON — The Federal Reserve slashed its key interest rate Tuesday, moving to deliver shock therapy to financial markets nervous about sub-prime mortgages and a stubborn credit crisis.
The half-point cut in the benchmark short-term rate was steeper than most analysts had expected. And Wall Street, which had worried increasingly in recent weeks that the housing and credit problems could put the economy into recession, rallied on the news. The Dow Jones industrial average soared more than 330 points, or 2.5%, its sharpest one-day point gain in more than four years.
"It was everything the market had been begging for for weeks -- and more," said Richard A. Weiss, chief investment officer at City National Bank in Los Angeles.
But the Fed's aggressive action risks fueling inflation. Implicitly acknowledging that risk, the central bank expressed concern about prices for the first time in weeks and signaled that it did not plan a series of rate reductions, which some analysts have predicted.
The contrary combination of a larger-than-expected cut and the signal that the Fed has little interest in making further rate reductions captured the hard-to-read nature of the economy's current condition.
On the one hand, the housing market has been roiled by surging defaults on sub-prime mortgages, which go to borrowers with less-than-perfect credit histories. The defaults rippled through financial markets, which until this summer had favored mortgage-backed securities, convincing many investors that the financial products were nowhere near as secure as they'd previously thought and causing many to stop buying them.
On the other hand, aside from the housing and financial sectors, the economy has continued to show moderate strength and low inflation.
And, in a sign of how an action that buoys one group of economic participants can be bad news for others, the rate cut sent the dollar tumbling to a record low against the euro, and an index showing the value of the dollar compared with six other currencies fell to its lowest level in 15 years.
The rate cut was cold comfort to the foreign investors whose purchases of U.S. securities have been crucial to financing the nation's debt-heavy economy. That's because the dollar's decline automatically reduced the value of those securities in the investors' home currencies.
