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Fed Cuts Rate 0.75% and Stocks Swing>>>
By MICHAEL M. GRYNBAUM and JOHN HOLUSHA
The Federal Reserve, responding to an international stock sell-off and fears about a possible United States recession, cut its benchmark interest rate by three-quarters of a percentage point on Tuesday, an aggressive move that came ahead of a regularly scheduled meeting of the central bank.

The Fed’s policy-making group, known as the Federal Open Market Committee, lowered its target for the federal funds rate, which regulates overnight loans between banks, to 3.5 percent, from 4.25 percent.

The surprise move, unusual in both its scale and its timing, underscored the severity of the current strains facing the economy. And it bolstered world markets that had opened the week with a sell-off. European stocks turned upward on the news, and Wall Street averted the deep losses that had been anticipated overnight.

“It’s a once-in-a-generation event,” said Mark Zandi, chief economist at Moody’s Economy.com. In recent years, the Fed has rarely acted between scheduled meetings of the committee, and almost always in increments of one-quarter or one-half point. It was the biggest short-term cut since October 1984.

In a statement Tuesday morning, Fed officials said they made the decision to lower rates after “a weakening of the economic outlook” and noted that “broader financial market conditions have continued to deteriorate.”

The move came as efforts continued to put together an economic stimulus package that could win swift bipartisan approval. President Bush met with Congressional leaders at the White House on Tuesday afternoon, expressing confidence that his administration and Congress would find “common ground” on a stimulus package.

“Everybody wants to get something done quickly,” Mr. Bush said, referring to the economic “uncertainty.” “We want to make sure it’s done right.”

For the shaken world markets, the Fed’s move seemed to provide some relief. When trading resumed after a Monday holiday, Wall Street initially joined in the plunge that had shaken Europe and Asia for two days. But after opening down by more than 460 points, the Dow Jones industrial average regained most of its losses, closing off 128.11 points, or 1.1 percent, at 11,971.19. It was the lowest close in 15 months.

Other indexes were down slightly more, but still less than the futures markets had indicated. And European markets came surging back, shaking off early losses, though not enough to make up for Monday’s plunge. Stocks in London and Paris closed more than 2 percent higher.

Jan Hatzius, chief United States economist at Goldman Sachs, said the timing of the Fed’s cut may turn market performance into a referendum on the Fed’s move.

“By itself, it’s not necessarily a wrong thing to do if you’re worried about systemic stability,” Mr. Hatzius said. “Nevertheless, it’s a little tricky because it ties you from a short-term perspective to what happens in the stock market.” A sell-off could be viewed as a vote of no confidence from investors, he said.

Economists were divided on Tuesday about whether the rate cut would help the economy stave off a recession.

“This is an effort to catch up and get ahead of flagging confidence in the weakening economy,” said Mr. Zandi, who has criticized the Fed for not responding faster to the current crisis. A smaller cut “might have created more panic among investors,” he added. “But the fact that they moved in such a decisive way strongly signals that they are going to work very aggressively to shore up confidence in the economy.”

In a related action, the Fed approved a 75 basis-point decrease in the discount rate, to 4 percent.

Futures markets are now expecting the Fed to cut another quarter-point off the federal funds rate at its regular meeting, which begins on Jan. 29.

In its statement, the Fed said: “The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. 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.”

“Moreover,” the statement continued, “incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”

Fed officials also indicated, albeit obliquely, that they were concerned about a possible recession. “Appreciable downside risks to growth remain,” the Fed said in its statement.

The White House maintained a confident face, but clearly worried about the impact of the global sell-off. “Americans should be confident that the long-term health of the American economy remains strong,” the press secretary, Dana M. Perino, said on Tuesday morning.

As the market news broke on a holiday, Treasury Secretary Henry M. Paulson Jr. called President Bush on Monday afternoon to brief him about what was happening.

“We don’t comment on daily fluctuations in the markets,” Ms. Perino said on Tuesday. She also declined to comment on the Federal Reserve’s rate cut, but she did urge Congress to move quickly to pass a stimulus measure, saying she hoped one could be passed within “weeks not months.”

“I’m not going to close the door, but I’m not suggesting that anyone believes it has to be bigger” than the roughly $150 billion figure already discussed, Ms. Perino said. Later, according to The Associated Press, Ms. Perino said that at this point the White House had not “seen higher numbers floated by members of Congress” and that Mr. Bush believed that the growth package he has outlined is “the right amount.”

Senator Harry Reid of Nevada, the majority leader, said Tuesday that Congress should aim to have a bill to President Bush for his signature within three weeks, Bloomberg News reported.

Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Banking Committee, said the Fed’s action was only a first step toward dealing with the recent economic downturn and financial turmoil. “More action from policymakers is needed to help restore investor confidence and ease financial strains on homeowners,” he said.

In addition to the stimulus package that Congress is considering, he said, other steps will be needed to restore long-term growth and stability. He cited legislation to reform the Federal Housing Administration, to end predatory lending and to promote affordable home ownership.

The jockeying over legislative initiatives came as the head of the Congressional Budget Office cautioned that stimulating the economy using tax rebates or other fiscal policy measures is not simple or quick, and risks aggravating inflation if the impact arrives after the economy has recovered on its own.

Testifying before the Senate Finance Committee, the official, Peter Orszag, said workload issues at the Internal Revenue Service would prevent the mailing of rebate checks until after the peak tax filing in late May or early June. And then it could take 8 to 10 weeks to distribute the checks, meaning the impact of the action might not be felt until the second half of 2008 or early 2009.

Responding to questions, Mr. Orszag said previous efforts to stimulate the economy showed that lower-income families were more likely to spend extra money soon after receiving it, rather higher income households with the capacity to borrow. He said the key to any program to bolster the economy would be to get the funds to people who will spend it within two months.

He said any stimulus action should focus on the underlying economy, regardless of what was happening in financial markets, like stock and bond exchanges. In fact, he said, some forecasters are calling for “sluggish growth” this year, rather than a recession, where output actually shrinks for two consecutive quarters.

Mr. Paulson, speaking to the United States Chamber of Commerce, said Tuesday that the administration and Congress needed to agree quickly on a stimulus package.

“Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible,” Mr. Paulson said.

Mr. Paulson said he was optimistic that the administration and legislators could find a bipartisan “common ground” on the economic package and “get this done before winter turns into spring.”

He also said he hoped to do something in the next couple of weeks “that will make a difference this year.”

The Treasury Department, he said, was focusing on the way home mortgages are originated and traded and said the department is developing a new regulatory framework for subprime and jumbo mortgages where he said markets were not functioning well.

Steven Lee Myers and Brian Knowlton contributed reporting.

http://www.nytimes.com/2008/01/22/business/23cnd-fed.html?_r=1&bl&ex=1201150800&en=0019b93b4bb1c219&ei=5087%0A&oref=slogin