A day after global markets sank over worries of a possible U.S. recession, the Federal Reserve Bank on Tuesday sought to reduce the risk of further economic trouble by making steep three-quarter point cut in a key interest rate before U.S. markets opened, citing a weakening of the economic outlook.
In an unscheduled meeting, members of the money policy setting Federal Open Market Committee voted of 8 to 1, to lower the overnight lending rate banks charge to each other to 3.5 percent from 4.25 percent..
It was the first time since the days following the terrorist attacks of September 11, 2001 that the committee had called an emergency meeting. The FOMC had previously scheduled a meeting for January 29 and 30.
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 remarked in a statement released this morning.
The housing market downturn is expected to deepen, the Fed stated. Higher unemployment is also expected, it added.
Appreciable downside risks to growth remain,'' the Fed noted. 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.
U.S. opened sharply lower. Dow Jones Industrial Average fell more than 400 points at the start of trading.
The dissenting member from today's action was St. Louis Fed President William Poole, who wanted to wait until next week to vote in the belief that current conditions didn't justify the move now, the Fed reported. Absent from the vote was Fed governor Frederic Mishkin.
The Fed also lowered the discount window rate - the rate it charges institutions to borrow directly from the central bank - by 0.75 percent to 4 percent.