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Fed Sends Signal with Deep Cut to Interest Rate

Analysis: David Wessel of 'The Wall Street Journal'

The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of an American recession, cut a key interest rate by three-quarters of a percentage point on Tuesday, the biggest one-day move by the central bank in recent memory.

The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.

Despite the move, Wall Street plunged 311.99 points in the first hour of trading before recovering some of its losses. The Dow finished the day off 128.11 points at 11,971.19, according to preliminary calculations. The last time the index was below 12,000 was in March 2007.


Analysts said the milder decline at the end of the day after such a rough start showed the Fed's effort to reassure Wall Street had an impact.

The Fed action was the most dramatic signal it can send that it is concerned about a potential recession in the United States.

The Fed was expected to cut rates further, possibly as soon as their next meeting on Jan. 29-30, if there are continued signs that the economy is weakening.

"This move by the Fed was essential," said Lyle Gramley, a former Fed governor who is now a senior analyst with the Stanford Financial Group in Washington. "Bernanke promised in a speech earlier this month to take substantive action in a timely and decisive manner."

Gramley said that Bernanke was now exercising the kind of forceful leadership the markets had been hoping to see since the credit crisis hit in August.


Analysts said the fact that the Fed did not wait until its meeting next week to cut rates underscored the seriousness of the situation.

"The world's stock markets are in meltdown so the Fed came in with an inter-meeting move to try to stop the panic," Christopher Rupkey, senior economist at Bank of Tokyo-Mitsubishi.

In a brief statement, the Fed said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth." It said that "appreciable downside risks to growth remain" and held out the prospect of further rate cuts.

The rush of developments came on the same day that Democratic and Republican leaders in Congress were to meet with President Bush at the White House for talks on economic stimulus legislation. Such a measure presumably would involve tax rebates, business tax cuts and funding for a Democratic-led call for additional food stamp and employment aid.

The Bush administration, which had announced on Friday that President Bush supported a $150 billion economic stimulus package, said Tuesday that it was not ruling out doing more than the $150 billion proposal if necessary.

Treasury Secretary Henry Paulson said Congress and the administration need to agree quickly on a package of tax cuts.

"Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible," Paulson said in remarks to the U.S. Chamber of Commerce.

The Fed decision was taken during an emergency telephone conference with Fed officials on Monday night. Those discussions occurred after global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world's largest economy, could be headed into a recession.

Secretary Paulson said he was optimistic the administration and Congress could find common ground and "get this done long before winter turns to spring." Bush and the congressional leaders are looking for quick agreement on how to pump as much as $150 billion into the ailing economy to stave off a recession. The president last Friday put forward the broad outlines of a stimulus plan that would include tax cuts for individuals and businesses.

The administration's initial efforts failed to reassure global stock markets, which plunged Monday on rising fears that trouble in the U.S. economy could translate into weaker economic activity worldwide. U.S. markets were closed Monday for the Martin Luther King Jr. holiday.

Paulson did not specifically mention the steep plunge in global markets on Monday, which included declines in many markets that were the largest since the September 2001 terrorist attacks.

However, he did say he and his economic team have been in close consultations with policymakers in this country and around the world "as we closely monitor the global equity correction." Markets have been roiled since August, when the credit squeeze struck with force.

"I continue to have confidence in the underlying strength of the global economy," Paulson said.

From NPR reports and the Associated Press.

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