U.S. stocks and the S&P’s 500 Index rallied after the Federal Reserve cut its benchmark interest rate to a record low(which was more than expected by the market) and said it will employ “all available tools” to revive the economy.
The S&P 500 added 5.1 percent to 913.16. The Dow Jones Industrial Average gained 359.61 points, or 4.2 percent, to 8,924.14.
The Federal Reserve cut the main U.S. interest rate to as low as zero and said it will buy debt as the next step in combating the longest recession in a quarter-century and reviving credit.
The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the FOMC (Federal Open Market Committee) said today.
9 rate cuts in the prior 14 months and $1.4 trillion in emergency lending failed to reverse the economic downturn. Today, the Fed said it will target a federal funds rate of between zero and 0.25 percent.
“The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” the FOMC said.
Fed lowered the rate on direct loans to banks and securities dealers to 0.5 percent. It set the payment on the reserves that commercial banks hold at the Fed at 0.25 percent, down from 1 percent.
The Bank of Japan has been the only major central bank in modern times to mix a policy of steep rate reductions with quantitative easing, or the strategy of injecting more reserves into the banking system than needed to keep the target rate at zero.
Japan’s central bank kept its main rate at zero from 2001 to 2006 while flooding the banking system with extra cash to encourage lending, spur growth and overcome deflation.
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