The U.S. Federal Reserve took aggressive action Tuesday to counter a credit crisis that's leading to fears of a recession. It announced that it will cut its key lending rate by three-quarters of a point, bringing it to 2.25 per cent, the lowest it's been in more than three years.
The announcement -- along with a better-than-expected earnings reports from big brokerage firms Goldman Sachs and Lehman Brothers -- gave a big boost to U.S. and Canadian markets Tuesday. The Dow Jones Industrial Average closed up by 420 points -- and the Nasdaq was up 91 points.
The Toronto S&P/TSX closed ahead 184.55 points to 13,136.7. The TSX had closed down about 300 points Monday at 12,952.15. Despite some good news, analysts are still concerned about the long-term economic outlook.
"While there was a relief rally with Goldman and Lehman, the fundamentals are still that these companies had a very sharp decline in profitability. It just wasn't as bad as analysts originally had expected," said Fred Pynn, president and CIO of Bissett Investment Management in Calgary.
The Fed was also cautious earlier in the day about the overall economic picture.
"Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity," the Fed said in a statement issued Tuesday.
"However, downside risks to growth remain. The committee will act in a timely manner as needed to promote sustainable economic growth and price stability."
Some investors were disappointed by the Fed's rate cut, with some hoping it would have been a full percentage point drop.
"The U.S. Federal Reserve found itself in a tight spot,'' BNN's Michael Hainsworth told 麻豆影视net late Tuesday afternoon.
"If it cut a whole percentage point that would stoke inflation. It might help the economy but in the long term do more damage than good."
Analysts said the Fed may have found itself constrained by news that core inflation for U.S. wholesale prices jumped 0.5 per cent in February, the steepest increase since November 2006.
The Bank of Canada is slated to make its own interest rate announcement next month. It's expected that new governor Mark Carney could make his own interest rate cut of 50 basis points, but some analysts say the overnight rate cut may only be a quarter of a percentage point. Canada is not facing the same inflationary pressures as the U.S.
Tuesday's move by the Fed was the latest in a series to shore up the U.S. financial system. There was an emergency cut of a quarter-point on Sunday night, and a Fed intervention in the JPMorgan Chase fire-sale purchase of Bear Stearns, an investment bank ravaged by the subprime mortgage and credit crunch crisis.
"Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the Fed said.
The credit crunch spurred by the subprime mortgage crisis has spread into other parts of the U.S. financial markets, and this is squeezing some financial institutions.
With files from The Associated Press
