The Federal Reserve cut its benchmark rate 75 basis points to 3.5 percent in response to a worldwide sell-off in stock exchanges as fears of a recession widened.
The rate cut was the largest since 1984. The Dow plunged over 460 points after the opening bell but regained lost ground to close down 128.11 points. The decision came from the Federal Open Market Committee, the policy-making group headed by Federal Reserve Chairman Ben Bernanke, which is scheduled to meet Jan. 29. At that time, the Fed could decide to cut rates another half point. The Fed rarely decides to cut rates ahead of a meeting, but the turmoil in the overseas markets on Monday prompted Bernanke to react quickly on Tuesday.
"The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth," said the Fed 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 Fed Board of Governors also approved a related 75-basis-point decrease to 4 percent, approving requests by the boards of directors of the Federal Reserve Banks of Chicago and Minneapolis.
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