Fed Slashes Interest Rates
The action by the rate-setting Federal Open Market Committee took the key federal funds rate, which governs overnight lending between banks, down to 3.5 percent, its lowest level since September 2005. The Fed also lowered the discount rate it charges on direct loans to banks to 4 percent.
The move comes amid a massive global stock sell-off brought on by deepening fears that a U.S. recession would drag the rest of the world economy down with it. U.S. stock markets, closed on Monday, appeared headed for a much lower open, although stock index futures pared some losses after the cut.
"It is obviously a surprise but it seems the markets could not wait for the promised rate cut at the end of the month and neither could the Fed given the behavior of the markets over the last few days," said Kevin Logan, economist at Dresdner Kleinwort Wasserstein in New York.
It was the largest single shift in interest rates since November 1994, when the Fed raised rates by three-quarters of a point, and it was the first rate cut in between regularly scheduled policy meetings since September 17, 2001, the first day U.S. financial markets reopened after the September 11 terror attacks.
The last time there was a rate cut of at least three-quarters of a point was in October 1984.
"The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth," the Fed said in a statement. "While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households."
"Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets," the central bank said.
The Fed rarely cuts rates in between scheduled meetings, but stock markets around the globe had sold off heavily this week, posing another challenge to a U.S. economy already struggling under the weight of a deep housing slump and tight credit conditions.
"Appreciable downside risks to growth remain," the Fed said.
Fed policy-makers are scheduled to meet on January 29-30 and, in the wake of the central bank's bold rate cut on Tuesday, financial markets were expecting the Fed to again lower borrowing costs by at least a quarter of a point.