Fed takes action to rescue markets

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 yesterday 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 funds rate cut on records going back to 1990.

Federal Reserve Chairman Ben Bernanke and his colleagues took the action after an emergency video conference on Monday night, a day when global markets had been pounded by rising concerns that weakness in the world's largest economy was spreading worldwide.

Despite the Fed's bold move, Wall Street plunged at the opening. The Dow Jones industrial average was down 300 points in the first hour of trading and the dollar tumbled against the euro.

In New York morning trade, the euro was up 1.2 per cent on the day at $1.4622 after briefly racing to $1.4634. The euro has rebounded from a one-month low against the dollar of around $1.4366, according to Reuters data.

Against the Swiss franc, the dollar was down 1 percent to 1.0973 francs. The dollar was thumped against the high-yielding Australian and New Zealand dollars.

The dollar, however, fared better against the yen, with analysts citing repatriation flows on the back of collapsing equity prices. It traded up 0.5 percent at 106.54 yen.

The dollar touched its lowest in more than two and a half years against the yen.

In a brief statement explaining its move, the Fed said that 'appreciable downside risks to growth remain' and officials pledged to 'act in a timely manner' to deal with the risks facing the economy. The action was approved on an 8-1 vote.

Analysts said the fact that the Fed did not wait until its meeting next week to cut rates underscored the seriousness of the situation.