Fed cuts interest rate by 0.75%

WASHINGTON: The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, slashed a key interest rate by three-quarters of a percentage point on Tuesday and indicated further rate cuts were likely.

The surprise reduction in the federal funds rate from 4.25 down to 3.5 per cent marked the biggest one-day rate move by the central bank since it cuts its discount rate by a full percentage point in December 1991, a period when the country was struggling to get out of a recession.

Analysts said the Fed will likely delay cutting rates further at its January 29-30 meeting but will probably keep moving rates down aggressively as the economy continues to weaken.

"This move is not an instant fix," said Ian Shepherdson, chief US economist at High Frequency Economics. "The economy is still staring recession in the face, but at least the Fed now gets it."

In addition to cutting the funds rate, the Fed said it was reducing its discount rate, the interest it charges to make direct loans to banks, by a similar three-quarters of a percentage point, pushing this rate down to 4 per cent.

Commercial banks responded to the Fed's action on the funds rate by announcing similar cuts of three-quarter of a percent on its prime lending rate, the benchmark for millions of business and consumer loans. The action will mean the prime lending rate will drop from 7.25 per cent down to 6.50 per cent.