Fed cuts rate to stanch market bleed-out

In an surprise move, the Federal Reserve cut interest rates — the rate at which banks borrow from other banks — from 4.25% to 3.50%, as world financial markets were roiled by concerns that the U.S. economy is teetering on the brink of a recession. The rate cut came eight days shy of the Fed's originally scheduled meeting on Jan. 29-30. The last rate cut, on Dec. 11., brought the rate down a quarter point from 4.50% to 4.25%. The Federal Reserve has slashed the federal funds rate by 1.75% since Sept. 18, when it stood at 5.25%. In a related action, The Fed also cut its discount rate — the rate at which the Federal Reserve lends directly to commercial banks — 0.75% to 4%. The FOMC made the cut due to a "weakening of the economic outlook and increasing downside risks to growth," according to the FOMC 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," the statement read. The FOMC also said that incoming economic data indicates a continued decline in the housing markets and some softening in the labor markets. Additionally, the committee said it expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully. St. Louis Federal Reserve president William Poole was the lone dissenter to the cut, stating that he did not believe that current conditions justified Fed action before the regularly scheduled meeting next week. Following the opening bell, The Dow Jones Industrial Average tumbled 456.92 points, or nearly 3.7%, to 11,642.38. The Nasdaq Composite slumped 118.82, or 5.3%, to 2,221.20. The Standard & Poor's 500 was off 59.61, or 4.5%, to 1,274.65. Each of the major market indicators began to rebound as the morning progressed. "The 75 point basis point cut is the FOMC's attempt at circumventing headline news from becoming a self-fulfilling prophecy," said Sam Stovall, chief investment strategist at Standard and Poor's of New York. "Because this is such a media-centric country, Wall Street woes can translate into Main Street worries very quickly. The FOMC wanted to do what it could to make today's market decline less severe than it could have been." Mr. Stovall added that S&P chief economist David A. Wyss believes that there will be an additional 0.25% rate cut at the end of the month.