Fed Lowers Rates in Reaction To Monday’s Market Turmoil
The Federal Reserve, confronted by deepening panic in global financial markets about a possible recession in the United States, struck back on Tuesday morning with the biggest one-day reduction of interest rates on record and at least temporarily stopped a vertigo-inducing plunge in stock prices.
The unexpected decision came after a rare, hastily called policy meeting by video conference on Monday evening, and it reduced the Fed’s benchmark overnight lending rate by three-quarters of a percentage point to 3.5 percent.
The Fed’s move was prompted in part by turmoil in global markets on Monday, a holiday in the United States. Shortly after lunch that day, Fed Chairman Ben S. Bernanke PhD ’79 canceled a planned trip to New York and started organizing the impromptu meeting of Fed officials who decide interest rate policy. The Treasury secretary, Henry M. Paulson Jr., watching the same market turmoil, was sufficiently anxious that he called President Bush at the White House.
In a statement accompanying the Fed’s decision, which was announced about an hour before the stock market opened for trading, officials hinted that they may well reduce rates yet again at their scheduled meeting next Tuesday and Wednesday.
The magnitude of the Fed’s rate cut helped reverse what began as a horrendous day in the stock markets. European and Asian stock prices had already plunged for the second day in a row, and the Dow Jones industrial average fell 464 points — about 5 percent — as soon as markets opened in New York.
By the close of trading Tuesday afternoon, stock prices, after gyrating wildly for hours, had clawed much of their way back. Shares of banks and insurers of mortgage-backed securities, which had been battered in recent days, were among the day’s biggest gainers.
“Wall Street is incredibly jittery,” said Len Blum, a partner at Westwood Capital, a boutique investment bank in New York. “They don’t know how to react to it. The last time they did a rate cut in between meetings was after Sept. 11, 2001.”
The Fed’s move came as Bush and congressional leaders pledged to work together on a bipartisan fiscal measure to jolt the economy with about $145 billion in tax rebates, tax breaks for businesses, and possibly additional payments to low-income people.
“I believe we can find common ground to get something done that’s big enough and effective enough,” Bush told reporters. Sen. Harry Reid, the Senate majority leader, said he hoped Congress could pass a bill before the Presidents Day recess on Feb. 18.
Still, it was a nerve-wracking day on Wall Street, with the Dow ending down 128 points, or about 1 percent. And even after the rebound, the major market indexes are down about 10 percent so far in January and even further off their recent highs in October. The Nasdaq composite index, which mostly reflects technology stocks, is off 18.3 percent.
And economists said it remained far from clear that the United States will avoid a recession, either because the Fed and the Bush administration had moved too slowly or because the economy’s woes were too acute to solve so quickly and painlessly.