Fed Cuts Key Interest Rate by a Half PointWASHINGTON, Sept. 18 — The Federal Reserve today lowered its benchmark interest rate by a half point, a forceful policy shift intended to limit the damage to the economy from the recent disorder in the housing and credit markets. Skip to next paragraphRelatedFederal Reserve StatementThe New York TimesWhile an interest rate cut was widely expected, there had been profound uncertainty about whether the Fed would choose a more cautious quarter-point reduction. But the bolder action and an accompanying statement, both approved by a unanimous vote of the central bank's policy-setting committee, made it clear the Fed decided the risks of a recession were too big to ignore. "Developments in financial markets since the committee's last regular meeting have increased the uncertainty surrounding the economic outlook," the central bank said. Signaling that it might cut rates more if necessary in months ahead, it said it would "continue to assess" the economic outlook and "act as needed to foster price stability and sustainable economic growth." The decision, which reset the overnight lending rate between banks to 4.75 percent, was the Fed's first rate cut in four years.Stocks immediately soared. The Dow Jones industrial average had been up about 75 points shortly before the announcement at 2:15 p.m., and within seconds it jumped another 100 points. Shortly after 3:30 p.m., it was showing a gain of 300 points on the day, or more than 2 percent.For consumers, the Fed's move could mean lower borrowing costs on for mortgages and automobile loans. But the impact may be muted, because investors remain deeply anxious about the credit quality of mortgages and other long-term loans. The main problem in the past month has not been high rates so much as the availability of capital to complete deals. In a separate move to bolster the banking system, the Fed also said today that it had cut its discount lending rate, which applies to short-term emergency loans to banks, to 5.25 percent — also a half-point cut. This was the Federal Reserve's most abrupt reversal of course since January 2001, when it suddenly slashed rates at an unscheduled emergency meeting because of signs that the economy was slipping into a recession. The last half-point cut in the federal funds rate came in November 2002. Economists said that the Fed's move today was similarly pre-emptive. "Monetary policy makers are worried about growth being seriously compromised and are prepared to take whatever prudent steps they can to avoid a deep slump," said Joshua Shapiro, chief United States economist for MFR. Some aspects of today's Fed's move could fuel inflation fears. Gold, a traditional investment safe haven in times of inflation, soared immediately after the Fed's decision was announced. As United States interest rates became less attractive for investment, the value of the dollar against the euro touched a new low before recovering slightly, and oil prices continued to climb even further above $80 a barrel. In the stock market, financial stocks posted the biggest gains, reflecting the fact that banks now will face lower borrowing costs, which should help drive profits higher."Shock therapy," was the assessment of Ethan Harris, chief economist at Lehman Brothers. But Mr. Harris cautioned that the Fed stopped short of signaling a firm commitment to more rate reductions. While it dropped its previous statement that inflation was still the "predominant concern," which would argue against using lower rates to stimulate the economy, the Fed said that "inflation risks remain" and that it would "monitor inflation developments carefully." David Rosenberg, chief North American economist at Merrill Lynch, said the Fed appeared deliberately ambiguous about its readiness to cut rates even further at its policy meetings in October and December."The Fed kept its cards much closer to its vest than anyone would have guessed," Mr. Rosenberg said. "It's not at all clear they think they have more to do." As recently as six weeks ago, the central bank was still predicting "modest" growth for the economy and warning that inflation remained its "predominant concern." As in 2001, the Fed's move today came after a panic in financial markets and the collapse of a speculative bubble. This time, the panic is in credit markets spooked by dubious mortgages on inflated housing prices. Back then, it was the stock market that crashed, initially because the air went out of inflated dot-com stocks. In the jargon of economists, the turmoil in both cases represented a sudden "repricing" of risk. Other signs have surfaced recently that the financial market upheaval may not be isolated. Earlier this month, the Labor Department reported the first monthly loss of jobs in four years. Employers eliminated 4,000 positions in August, a factor that may have played a role in the Fed's decision today. ?By today, it seemed clear that Fed policy makers were no longer debating whether to reduce rates but how much to lower them. Despite the seemingly narrow debate — whether to lower the overnight federal funds rate by one-quarter of a percent or by one-half of a percent — the uncertainty about this policy meeting was higher than any other in the past four years. The debate within the Fed was all about risk probabilities: what were the odds the twin meltdowns in housing and mortgage markets would tip the overall economy into a recession later this year? If policy makers cut rates too cautiously, they risked a recession; if they cut them too much or too early, they risked stoking inflation. Ben S. Bernanke, chairman of the Federal Reserve, had made it clear over the past month that the Fed did not simply want to rescue Wall Street investors who made bad bets or real estate speculators who bought properties on the assumption that prices would keep skyrocketing. But Mr. Bernanke also pledged that the Fed would act if the dislocation in financial markets or the downturn in housing threatened to derail overall growth.Just a few hours before the central bank announced its decision, new statistics indicated that the pace of home foreclosures is accelerating. RealtyTrac of Irvine, Calif., reported that foreclosure filings — from default notices and auction sales to bank repossessions — were 36 percent higher in August than in July and 115 percent higher than one year ago. The Labor Department also reported today that producer prices fell by 1.4 percent in August — much more than expected — because of slumping energy prices. That was positive news on inflation, but analysts said it was unlikely to have much influence on the Fed because the "core" measure excluding energy and food prices increased 0.2 percent, slightly more than expected.Except for the housing downturn, which Fed officials admit is much more severe than they had expected, the evidence of a recession in the real economy is ambiguous. Global economic growth is much stronger than in 2001, and American exports have climbed about 14 percent over the last year. Instead of the United States' being the world's engine of growth, the global economy could now become the engine of American growth.For the last four years, the Federal Reserve has telegraphed its intentions months in advance as it pursued a gradualist approach of slow but steady adjustments in monetary policy. It advertised its intention to raise rates gradually many months before it actually did so in June 2004, and then raised rates in well-signaled increments at each policy meeting over the next two years. By contrast, Wall Street analysts were sharply divided as of early today about how much the Fed would cut rates and what it would say in its statement about the economic outlook.A smaller rate reduction posed a risk of moving too slowly if the economy was indeed in danger of stalling. But a bigger rate reduction could have been taken as a sign of Fed panic, and it added to the risk of stoking inflationary pressures that the central bank had just begun to tamp down. But the evidence so far is inconclusive. In August, for the first time in four years, the Labor Department estimated that the number of jobs declined slightly. It also reduced its estimates of job growth in June and July, suggesting that the labor market weakened even before credit markets froze up in early August. But other indicators — on consumer spending, consumer confidence and export growth — point to a continuation of modest growth.Right or wrong, today's decision will be a defining moment for Mr. Bernanke, the former economics scholar at Princeton who became Fed chairman in February 2006. Many Wall Street economists place the odds of a recession at about one in three or somewhat higher. Alan Greenspan, who preceded Mr. Bernanke as Fed chairman, puts the odds at somewhat more than the one-in-three that he estimated earlier this year. The Fed's course change has been under way since early August, when fears about huge losses on subprime mortgage loans and continued downturn in housing caused a much broader panic in credit markets.The resulting credit crunch has now affected all but the safest home mortgages, and also greatly reduced the ability of private equity funds and hedge funds to borrow money at low rates. Many banks, which had been planning to resell their loans into the giant market for tradable commercial debt securities, are now being forced to absorb loans that the securities markets will no longer take. On Aug. 17, the Federal Reserve moved to ease the liquidity crisis by encouraging banks to borrow money through its "discount window," a program originally created as an emergency source of overnight funds for banks in a cash squeeze. But by most accounts, the turmoil in credit markets has abated very little. The market for subprime mortgages has all but disappeared, and demand for all forms of "asset-backed commercial paper," which are securities backed by mortgages, credit card debt, company receivables, remains very weak.