Fed Slashes Benchmark Rate After Global Markets Dive
WASHINGTONÂ – Hoping to reverse a global stock sell-off and prevent a Black Tuesday, the Federal Reserve Board early Tuesday morning cut its benchmark lending rate by three-quarters of a percentage point, to 3.5 percent, the largest such reduction in memory.
The Fed already had signaled deep rate cuts when it meets again Jan. 29-30, but huge percentage declines in European and Asian stock markets Monday _ while U.S. markets were closed for the Martin Luther King Jr. holiday _ led the Fed’s rate-setting Open Market Committee to consult late Monday night and decide on the reduction before its next scheduled meeting.
"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," the Fed said in a statement Tuesday morning. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."
The Fed’s action was the first inter-meeting cut since Sept. 17, 2001, the week after the 9-11 terrorist attacks
At the 9:30 a.m. EST opening Tuesday, the Dow Jones Industrial Average plunged more than 400 points. Stocks were rallying within a half-hour, but still were down by more than 150 points by 11 a.m.
The trigger for the global stock sell-off was fears that the U.S. economy was heading into recession, and a belief that the economic stimulus plan that President Bush and Congress are negotiating amounts to too little too late.
"Yesterday’s rout of overseas stock markets shows that this is a global financial crisis and there is a risk of a global slowdown," Mark Vitner, an economist with the national bank Wachovia, based in Charlotte, N.C., said in a note to investors that predicted another half-point rate cut next week at the scheduled Fed meeting.
Everyday Americans have a large stake in Wall Street’s plunge or rebound.
Millions of Americans depend on the stock market, through their 401(k) plans, for their retirement income. A falling stock market amounts to declining wealth, in the short run at least, and comes on top of rising consumer inflation, which measured 4.1 percent last year, and sky-high energy prices.
By cutting its federal funds rate, an overnight rate that banks charge each other, the Fed seeks to make it cheaper for banks and consumers to borrow and thus stimulate economic activity. Commercial banks follow suit by cutting the prime rate, charged to their best customers. The fed funds rate fell to 3.5 percent, and the prime rate now stands at 6.5 percent.
The Fed’s Web site statistics date only to 1990, and since then there hasn’t been such a steep cut of three-quarters of a percentage point. The Fed raised rates by that amount in 1994, but it’s never cut rates by more than a half-point since recordkeeping began.
The Fed’s action Tuesday included a three-quarters of a point cut to the discount rate, the rate at which banks take out short-term emergency loans from the Fed.
In its statement, the Fed left open the possibility that it could rates further when it meets next week.
"Appreciable downside risks to growth remain. The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks," the Fed said.
Treasury Secretary Henry Paulson, a former Wall Street titan, told the U.S. Chamber of Commerce on Tuesday morning that the Fed had showed itself as nimble and flexible in addressing crisis.