The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 1 1/4 per cent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 3/4 per cent.

The size of the cut was a surprise, with the market calling for a 25 bps cut. Markets rallied immediately following the decision. The had been trading in a tight range this morning.

The move to a neutral bias suggests that the Fed is not worried about the economy’s long-term prospects. “The Committee continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity,” it said. “However, incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production, and employment. Inflation and inflation expectations remain well contained.”

The Fed said that in these circumstances, “the Committee believes that today’s additional monetary easing should prove helpful as the economy works its way through this current soft spot. With this action, the Committee believes that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are balanced with respect to the prospects for both goals in the foreseeable future.”

The Fed also reported that the vote was unanimous this time around.