Stocks Down After Surprise Fed Rate Cut

The central bank's move, signaling increased fears of recession, is its largest cut since 1984.

Traders work on the floor of the New York Stock Exchange January 22, 2008 in New York City. The Federal Reserve, in reaction to a severe downturn in worldwide stock markets and concern about a United States recession, reduced its interest rate by three-quarters of a percentage point before the opening NYSC bell.

The Federal Reserve reduced its interest rate by three-quarters of a percentage point before the opening NYSC bell.

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A surprise interest rate cut by the U.S. Federal Reserve sent Wall Street lower today as Fed Chairman Ben Bernanke and other central bankers showed they're deeply worried about the immediate future of the U.S. economy.

In an unscheduled meeting, central bankers slashed the benchmark fed funds rate by three fourths of a percentage point to 3.5 percent, warning that the economic outlook is "weakening" amid increasing risks to future growth. The move—the largest rate cut since October 1984—may not be the Fed's last. Officials describe downside risks to growth as "increasing" even after this latest loosening of monetary policy. Analysts don't expect another cut at the upcoming Fed meeting scheduled for January 29 and 30, but more easing is possible by the end of March.

Stocks opened lower following the announcement, though the move may have staunched even heavier selling following a huge drop in world markets on Monday, when Wall Street was closed for the Martin Luther King holiday. Fears that already ailing U.S. shares would follow suit today dominated headlines over the holiday weekend.

Analysts say the Fed's decisive move to inject liquidity into the markets via lower interest rates was overshadowed by poor earnings from some of the more troubled sectors of the economy, including banks. Both Bank of America and Wachovia announced poor results.

In its statement, the Fed warned that while some parts of credit markets have improved, tight lending conditions still hamper some businesses and consumers at a time when unemployment is on the rise and the battered housing market continues to show no sign of hitting bottom.

Slashing rates hints that Fed officials are more concerned about the U.S. economy sliding into a nasty recession than previously thought, given Bernanke's reluctance to use the "R" word in recent testimony and speeches.