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Stock Analyst Update

Fed Cuts Interest Rate to 2.5%

Fed lowers overnight interest rates to lowest level since 1962.

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To help boost the sagging economy, the U.S. Federal Reserve announced Tuesday afternoon it has cut its target for the federal funds rate from 3% to 2.5%, its lowest level since 1962. Although the rate cut only directly impacts the prices banks charge each other for overnight loans, the "overnight rate" is widely used as a benchmark by commercial banks in setting their own prime and mortgage rates. As such, the rate cut could eventually spur growth by pushing down the costs of consumer and business loans. But because interest-rate cuts usually take time before they heat up the economy, economists are also hoping the rate cuts provide a quick psychological boost to the increasingly anxious American consumer. 

The announcement lifted the spirits of an already-cheerful stock market. The Dow Jones Industrial Average ended higher by 113 points, or 1.3%, to 8,950. The Nasdaq Composite index rose 11 points, or 0.8%, to 1,492, and the S&P 500 index climbed 12 points, or 1.2%, to 1,051.

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Elizabeth Armbuster does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.