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. Last Updated: 07/27/2016

Fed Cuts Rate, Cheers Investors

WASHINGTON -- The U.S. Federal Reserve approved a half percentage-point cut in its discount rate on loans to banks, a dramatic move designed to stabilize financial markets roiled by a widening credit crisis.

Friday's action sent stocks soaring, with the Dow Jones industrial average up more than 300 points right after the opening bell. The blue chip index finished the day up 233.30 points at 13,079.08.

The decision means that the discount rate, the interest rate the Fed charges to make direct loans to banks, will be lowered to 5.75 percent from 6.25 percent.

The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year, but it sent a strong signal in the wording of its statement that it was prepared to cut that rate as well.

It did that by dropping any reference to inflation, which was the worry that previously had kept it from cutting the federal funds rate, and instead stated that "the downside risks to growth have increased appreciably."

Many economists said the move from an emphasis on inflation worries to an emphasis on worries about economic growth is the precursor to an actual cut in rates, probably at the next regular Fed meeting on Sept. 18.

"They provided a much needed response to the growing market turmoil today, but they will have to do more," said Mark Zandi, chief economist at Moody's Economy.com.

Some analysts said the funds rate would be cut at least twice before the end of the year, while others predicted the Fed would cut the funds rate by one-quarter point at each of its remaining meetings in September, October and December if the risks of an economic slowdown keep growing.

The move to cut the discount rate will not have a major impact on consumer interest rates in the way that cutting the federal funds rate triggers an immediate drop in banks' prime lending rate, the benchmark for millions of consumer and business loans.

Friday's move was expected to help, however, with a severe cash crunch facing many businesses, including mortgage companies, which are having trouble getting loans for short-term financing needs. In a statement explaining the action, the Fed said that while incoming data suggest the economy is continuing to expand at a moderate pace, "the downside risks to growth have increased appreciably."

The Fed said it was "monitoring the situation and was prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

Since setting a record close of 14,000.41 just a month ago, the Dow Jones industrial average has shed 1,154.63 points in a string of triple-digit losing days that have raised anxiety levels not just on Wall Street but on Main Street as well.

The markets have been pummeled by a rapidly spreading credit crisis that began with rising defaults in subprime mortgages -- home loans made to people with weak credit histories. Now the problems are spreading to other borrowers. Countrywide Financial, the largest U.S. mortgage banker, was forced to borrow $11.5 billion Thursday so it could keep making home loans.

The shockwaves have extended to giant Wall Street investment firms such as Goldman Sachs, which announced earlier in the week that it was pumping $2 billion into one of its struggling hedge funds and was asking other investors to put in another $1 billion.