By  on August 17, 2007

The Federal Reserve cut its discount rate a half point Friday after weeks of market volatility due to uncertainties in the credit market, sending stocks sharply higher in mid-morning trading.

”Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward,” the Federal Reserve said in a statement. “In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably.”

The Dow Jones Industrial Average rose 1.3 percent to 13,007.71; the S&P 500 gained 1.5 percent to 1,431.89; the New York Stock Exchange added 2.3 percent to 9,292.82; and the Nasdaq climbed 1.1 percent to 2,477.35.

Retail stocks posted significant gains - the S&P Retail Index jumped 2.3 percent to 462.71. Retail investors had worried whether a tightening in the credit market would affect consumers’ ability to spend money.

The Fed temporarily reduced its discount window’s primary credit rate by 50 basis points to 5.75 percent and announced term financing for up to 30 days, renewable by the borrower. The Fed’s discount window allows eligible institutions to borrow money, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions.

The Fed said the FOMC is keeping watch over the situation and is prepared to “act as needed” to ward off negative effects on the economy from disruptions in the financial markets.

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