Fed Cuts Interest Rate, London Stocks Rally

The Federal Reserve made an abrupt half-percentage point cut in the discount rate.

WASHINGTON - The Federal Reserve, declaring that increased economic uncertainty poses risks for U.S. business growth, announced Friday that it has approved a half-percentage point cut in its discount rate on loans to banks.

The action was the most dramatic effort yet by the central bank to restore calm to global financial markets which have been roiled in the past week by a widening credit crisis.

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

However, it has been infusing billions of dollars in money into the banking system over the past week to keep that rate from rising above the target level.

In premarket trading, U.S. stock futures reversed previous declines after the Fed's announcement.

Reaction in the London stock market was immediate - and very positive:

London's leading blue-chip shares jumped sharply at lunchtime after the US Federal Reserve cut interest rates to ease the credit crunch. The FTSE 100 index rebounded more than 200 points.

The Fed said that the downside risks to growth of deteriorating financial conditions had increased appreciably and that it was prepared to act as needed to mitigate any adverse effects on the economy.

At just after 1.30pm, the FTSE was up 225.6 points at 6,084.5, and the futures markets reversed earlier pessimism and pointed to a higher opening for Wall Street.

That's a good thing.

UPDATE: The Fed's press release.