Fed explains the big rate cut

NEW YORK (CNNMoney.com) -- The Federal Reserve cited an "exceptionally weak" housing market and concerns that this summer's credit crunch could lead to a pullback in both consumer and corporate spending as reasons behind its decision to cut interest rates by a half of a percentage point on Sept. 18, according to minutes from the meeting released Tuesday

The minutes showed just how seriously the Fed viewed the mortgage meltdown, which caused massive bouts of volatility in the stock and debt markets over the past few months.

The Fed said that a half-point rate cut, rather than the more conservative quarter-point cut that some investors were expecting, was "the most prudent course of action" in order to "help forestall some of the adverse effects on the economy that might otherwise arise" from deteriorating conditions in the credit markets.

Stocks, which were mixed before the minutes came out at 2 p.m. ET, moved to their highest levels of the day following the release of the minutes as investors apparently interpreted the Fed's concerns about the economy as a sign that more rate cuts are on the horizon.

The Fed lowered its federal funds rate, a key overnight bank lending rate that determines what consumers pay on various types of loans, to 4.75 percent on Sept. 18.

The central bank's policy making committee will announce at the conclusion of its next meeting, a two-day session that ends on Oct. 31, whether or not it will once again lower the federal funds rates.

According to futures listed on the Chicago Board of Trade, investors are pricing in the strong likelihood of at least one quarter of a percentage point rate cut between now and the end of the year. The Fed's final meeting of 2007 is scheduled for December 11.