WASHINGTON (Reuters) - The Federal Reserve cut U.S. interest rates by a modest quarter-percentage point on Tuesday, disappointing Wall Street hopes for bolder action but offering some help to an economy facing credit strains and a deep housing slump.
The central bank's decision takes the bellwether federal funds rate, which governs overnight lending between banks, down to 4.25 percent. While the action was widely expected, some economists had thought the Fed might offer a bolder half-point reduction.
In a related move, the Fed trimmed the discount rate it charges for direct loans to banks by a matching quarter point. Here too, some market participants were dissatisfied. Many had thought the Fed would lower the discount rate by more than the federal funds rate to loosen tight credit markets.
The blue chip Dow Jones industrial average .DJI closed down 294 points, or 2.1 percent, while prices for U.S. government bonds surged as investors sought safer assets.
"This was not what the market was looking for and did not move to clarify Fed intentions or assuage concerns of market participants of another leg down in the economy and resurgence of financial turmoil," said Joseph Brusuelas, chief U.S. economist of IDEAglobal in New York.
A Fed source, who asked not to be named, said the central bank was aware credit market strains had grown worse and said it was actively considering ways to ease the pressure.
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