The central bank cut the target overnight lending rate to 3.5 percent from 4.25 percent, the Federal Open Market Committee said in a statement in Washington. Policy makers weren't scheduled to gather until next week. It's the biggest single reduction since the Fed began using the rate as the principal tool of monetary policy around 1990.
``Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households,'' the Fed said in a statement in Washington. The FOMC took the action ``in view of a weakening of the economic outlook and increasing downside risks to growth.''
Policy makers set aside concerns about inflation to lower borrowing costs for the fourth time since September after the unemployment rate rose, retail sales fell and stocks slumped. Chairman Ben S. Bernanke shifted the Fed's stance to a more aggressive approach in remarks this month citing a need for ``decisive and timely'' action.
The dollar slid and Treasury securities rallied after the announcement. Stocks slumped as some investors questioned whether the Fed would be able to avert a recession, and then recouped more than half the losses. The Standard & Poor's 500 Index fell 0.5 percent to 1,318.28 at 11:15 a.m. in New York, after dropping as much as 3.8 percent earlier.
Bear Market
Yesterday, almost half of the world's biggest stock indexes fell into a bear market as mounting concern about a U.S. recession dragged down banking and retail shares across Asia, Europe and Latin America.
``The bottom line was that financial conditions were tightening sharply'' and affecting the economic outlook, said former Fed economist Brian Sack, who is now with Macroeconomic Advisers LLC in Washington. ``The view so far has been that they're somewhat behind the curve and needed to adopt a somewhat more aggressive approach.''
The Bank of Canada, in a scheduled meeting, lowered its main interest rate by a quarter point today to 4 percent and signaled it will act again to shield Canada from the U.S. slowdown. The Bank of England said it has no plans to change the date of its next rate decision. The bank's policy makers are due to begin a two-day meeting in London on Feb. 7.
Paulson Reaction
Treasury Secretary Henry Paulson called the Fed's move ``very constructive'' and a ``confidence builder,'' when asked about the Fed decision after a speech in Washington. He also said it was a sign to the rest of the world that the U.S. central bank is ``nimble.''
Paulson, charged by President George W. Bush last week with negotiating a fiscal stimulus plan with lawmakers, said a package ``must be enacted quickly.'' White House spokeswoman Dana Perino told reporters that the administration hasn't ruled out a proposal exceeding $150 billion.
The Fed Board of Governors, in a related move, lowered the so-called discount rate on direct loans to commercial banks by a 0.75 percentage point to 4 percent. The Chicago and Minneapolis district banks had requested the reduction, the Fed said.
``Appreciable downside risks to growth remain,'' the Fed statement said. ``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.''
Futures Contracts
Traders had anticipated 75 basis points of rate cuts this month, according to futures prices on the Chicago Board of Trade.
The FOMC vote was 8-1, with St. Louis Fed President William Poole preferring to wait until the regularly scheduled meeting. Fed Governor Frederic Mishkin was absent and not voting.
Fed officials met by video conference at about 6 p.m. yesterday, spokeswoman Michelle Smith said. Mishkin was traveling and unable to participate, she said. The voting members were the same as in 2007 because the presidents don't rotate in until the first regular meeting, Smith said.
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