In a surprise move, the Federal Reserve cut its discount rate by a half point, to 5.75 percent, in response to the turmoil in the credit markets.

While it is not a cut in the Fed's most powerful lever on interest rates, the federal funds rate target, it is still the first official rate cut of any kind since 2001 and the first under its new chairman, Ben Bernanke.

In a separate statement, the Fed also indicated that it was changing its focus on concern on growth, rather than inflation.

"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward," the Fed said. "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. There was no mention of the dangers of inflation, which has been the central concern of the Fed of late.

While short of a full-fledged easing, the rate cut and the statement are clear signals that the Fed is grappling with the problems of tight credit markets.

The cut in the discount rate is largely symbolic: the rate is what commercial banks are charged for loans from Federal Reserve banks, but few banks step up to that window.

Stocks surged at the opening of trading, with the Dow Jones industrial average leaping 300 points in the first few minutes.

All bets are now on a cut in the Fed's benchmark federal funds rate -- currently 5.25 percent-- happening soon.

The chief economist of Lehman Brothers, expects two rate cuts. "Our new baseline forecast is a replay of 1998 where the Fed cuts to unfreeze the markets- we would expect cuts at both the September and October meetings," he wrote, according to the Wall Street Journal's MarketBeat blog

Related Links:

Nouriel Roubini's Blog: The Fed Has Already Cut the Fed Funds Rate...to 4.79%

Real Time Economics: How Does the Fed Keep Rates Near Its Target? A Primer