An aggressive Fed trims benchmark rate to 4.75%; first cut in four years

Moving aggressively to stimulate a slowing economy, the Federal Reserve Board yesterday voted unanimously to slice its benchmark interest rate by half a percentage point, its first rate cut in four years, sending the Dow Jones industrial average up 335.97 points, or 2.5 percent. It was the biggest one-day point gain for the Dow in almost five years.

The cut in the overnight lending rate, to 4.75 percent, reversed the Fed's long-held view that inflation posed the greatest risk to the US economy and put its focus squarely on stemming a downturn.

Yesterday's move should make it easier for companies to raise working capital and for cash-strapped consumers to get cheaper auto and home loans, while lowering rates on certificates of deposit.

But it also sends a signal that the Fed's board of governors, under chairman Ben Bernanke, has concluded the worsening problems in the housing and credit markets have begun to seep into the larger economy. August data showing weak retail sales and a loss of jobs underscored that threat and stoked fears of a recession.

"This is a risk-management move," said Keith Hembre, chief economist at Minneapolis mutual fund company First American Funds. "They're going to be aggressive right now rather than dragging their feet. To the extent that events have called into question the longevity of the expansion, it's wise on their part to try to eliminate that risk."

But some questioned whether the Fed itself was succumbing to market jitters at a time when many economists had been expecting only a quarter-point rate cut. Until recently, the Fed had resisted fueling the economy by lowering rates for fear of rekindling inflation.

"This can be perceived as a risky move, especially so early in Ben Bernanke's tenure," said Kenneth Beauchemin, US economist for the Waltham research firm Global Insight. "There's the danger that Wall Street starts looking to the Fed any time there's sand in the gears of the credit market, and it loses credibility as an inflation fighter."

The Fed, in a separate move meant to shore up confidence and help ease the credit crunch, lowered the discount rate for short-term loans to banks by a half-point to 5.25 percent.

Investors, who had been clamoring for a strong move by the Fed, lost no time in reacting to the rate cuts by snapping up shares of stocks.

In a statement yesterday, the top US bank's Federal Open Market Committee sought to counter any concerns it was ignoring the threat of inflation. "Readings on core inflation have improved modestly this year," the statement noted. But it acknowledged "some inflation risks remain" and said it will "continue to monitor inflation developments carefully."

The statement also conceded the economic outlook has clouded in the past month and promised to "act as needed to foster price stability and sustainable economic growth," a signal the Fed is prepared to cut rates further in coming months if necessary.

Kurt Karl, chief US economist for the insurer Swiss Reinsurance Co. in New York, said he was surprised by the half-point cut because the Fed hadn't tipped its hand before yesterday.

Karl said Fed policy makers may have been prompted to make a bold statement by mounting evidence that the credit problems were drying up not only low-quality loans but also jumbo mortgages used to finance higher-priced homes and commercial paper used by big companies for short-term borrowing.

"This was an aggressive move, and I think it was appropriate given the weak state of the economy," Karl said.

The move was applauded by businesses large and small.

Thomas F. Ackerman, the chief financial officer at Charles River Laboratories Inc., a biomedical company in Wilmington that is building a new corporate office, said, "It's good news for economic activity. It will be a relief to many people out there."

And, realtor Norman O'Grady, the owner of Prime Realty Group in Brighton Center, said he hoped the move would quickly translate into lower mortgage rates, spurring more buyers into the real estate market. "There have been fewer buyers shopping for homes," he said. "Hopefully this will free up some spending money."

Robert Weisman can be reached at weisman@globe.com. Todd Wallack of the Globe staff contributed to this report.