Holy Greenspan! Federal Reserve Cuts Fed Funds Rate by 50 Basis Points

After all but telling the world that it wasn't cutting rates prior to the May 15 meeting, the Federal Reserve went out and cut interest rates by 50 basis points to 4.5% a few minutes ago. The stock market is rallying sharply on the news and the bond market, already selling off due to the rally in stocks, hasn't moved too much as it was already priced for additional interest-rate decreases.

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This is the second time this year that the Fed has taken the unusual step of cutting interest rates between regularly scheduled meetings. The Fed cut the fed funds rate Jan. 3 during the market session, sparking a substantial rally in the market that lasted through most of the month.

The Federal Reserve, in a statement, sounded most concerned about the decline in corporate profits and the potential that it could continue to dampen capital spending. Business spending has fallen off dramatically in the last two quarters despite strength in the consumer sector, and recent economic reports show that employment declines, previously confined to the manufacturing sector, had started to bleed into the service economy.

"This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, threatens to keep the pace of economic activity unacceptably weak," the Fed said in its statement. "As a consequence, the Committee agreed that an adjustment in the stance of policy is warranted during this extended intermeeting period."

The major market indices have surged on the news. The Dow Jones Industrial Average rocketed 414 points to 10,630.80 -- nearly 300 points higher than it had been moments ago -- while the tech-heavy Nasdaq Composite Index soared 181 points to 2104.20 -- surging nearly 100 points in the minutes after the Fed cut.

The Fed has cut the fed funds rate by 200 basis points, or a full two percentage points, in the span of three and a half months in response to slowed economic growth. The fed funds rate is the rate at which banks lend money to each other. The Fed also cut the discount rate by 50 basis points to 4%. The discount rate is the rate at which banks can borrow from the Fed's discount window.