Fed Cuts Rate 0.75 Percentage Point in Emergency Move

By Scott Lanman
Jan. 22 (Bloomberg) -- The Federal Reserve lowered its benchmark interest rate in an emergency move for the first time since 2001 after tumbling global stock markets and a jump in U.S.
unemployment threatened to push the economy into recession.
The central bank lowered the benchmark 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 on rates until Jan. 29-30.
``While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate,'' 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 unemployment hit a two-year high and U.S. 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.
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. Today, futures pointed to the biggest decline in the Standard & Poor's 500 Index since September 2001.

Stock Reaction

U.S. stock-index futures pared their decline after the announcement, while surrendering some of those gains later.
Futures on the Standard & Poor's 500 stock index were down 3.4 percent at 8:30 a.m. in New York. They were down as much as 5.3 percent earlier.
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 FOMC vote was 8-1, with St. Louis Fed President William Poole preferring to wait until the regularly scheduled FOMC meeting. Fed Governor Frederic Mishkin was absent and not voting.
Today's so-called inter-meeting rate cut is the first since Sept. 17, 2001, when the Fed lowered borrowing costs in the aftermath of the terrorist attacks six days before. That was the third emergency reduction in a year which saw the last U.S.
recession.
Bernanke warned in a Jan. 10 speech and again in testimony to Congress Jan. 17 that the 2008 economic outlook had worsened and ``the downside risks to growth have become more pronounced.''
Still, he said the Fed wasn't forecasting a recession this year.

Economy Weakens

Retail sales fell last month, unemployment rose, and housing markets are mired in the worst slump in 16 years. Homebuilders broke ground on the fewest homes since 1991 last month, Commerce Department figures showed Jan. 17. Building permits, a sign of future construction, declined by the most in 12 years, suggesting the housing slump will deepen.
Bernanke told legislators at the House Budget Committee that banks were trying to protect asset quality and funding, and tightening credit conditions for the rest of the economy as a result. ``Banks have also evidently become more restrictive in their lending to firms and households,'' he said.
Fed policy makers have warned that housing will continue to be a damper on growth. Richmond Fed President Jeffrey Lacker said Jan. 18 that didn't expect homebuilding to ``bottom out'' in 2008. Bernanke said the day before that housing markets ``may continue to be a drag on growth for a good part of this year.''
In his Jan. 17 congressional testimony, Bernanke also endorsed the idea of a fiscal-stimulus package of as much as $150 billion to help revive economic growth, assuming the spending is quick and temporary. The next day, the Bush administration proposed a growth package of as much as $150 billion, without offering specifics.