The Federal Reserve, confronted
with a global stock sell-off fanned by increased fears of a 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.
The Fed action was the most dramatic signal it can send that it is
concerned about a potential recession in the United States. It marked
the biggest one-day move by the central bank in recent memory.
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.
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.” The central bank said that the
strains in short-term funding markets have eased a bit, but “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 move caught financial
markets by surprise. Many had expected the central bank would wait
until its meeting next week to make any move in interest rates. The
Fed made the move before markets had opened in the United States,
hoping that the bold move would limit the decline in U.S. stocks.
Before Tuesday’s move, the Fed had cut interest rates three times,
beginning in September, the month after a severe credit crunch had
roiled Wall Street and global financial markets. The Fed cut the funds
rate by a half-point in September and then by smaller quarter-point
moves in October and December.
