Fed delivers 3/4-point rate cut

The Federal Reserve slashed US interest rates on Tuesday, boosting Wall Street, which was already higher on stronger-than-expected investment bank earnings.

Tuesday's three-quarters of a percentage point rate cut was less than the full percentage point many in the market had expected, but the Fed left the door open to an additional reduction. However, it noted its future action would take inflation concerns into consideration.

The dollar soared to its largest single-day gain against the yen in nine years and rallied against the euro as traders responded to the less-than-expected rate cut. But US Treasuries fell as investors poured into stocks.

The Fed's action, taken on an 8-2 vote of its policy committee, was part of an intense effort by the central bank to avert a deep recession and financial market meltdown. The move took benchmark overnight rates down to 2.25 per cent, the lowest since February 2005.

The central bank has now cut rates by an aggressive 3 percentage points since mid-September, including 2 points since the start of the year. In addition, it has said in recent days it would provide around US$400 billion worth of liquidity to thaw frozen credit markets.

'Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters,' the central bank said.

In a statement outlining its rate move, the Fed said downside risks to economic growth remained even in the wake of the rate cut, suggesting an openness to lowering borrowing costs further if needed.

However, in the first double-dissent since September 2002, two officials - Philadelphia Federal Reserve Bank President Charles Plosser and Dallas Fed chief Richard Fisher - voted against the decision. They preferred less-aggressive action out of a concern sharp rate cuts could further fuel inflation.

Still, the Fed said it expected inflation to ease, partly because unemployment looked set to rise.

The rate action came two days after the central bank announced up to US$30 billion in financing to facilitate the sale of cash-strapped investment bank Bear Stearns, an unusual intervention bank officials said was necessary to prevent cascading defaults in the financial system.

Its backing for JPMorgan Chase and Cos agreement to buy Bears Stearns was one of a number of emergency steps the Fed announced on Sunday.

It also said it would extend loans to a wider array of Wall Street firms, not just commercial banks, for the first time since the Great Depression.

In addition, the Fed lowered the interest rate on 'discount window' lending by a quarter-point on Sunday. On Tuesday, in concert with its decision to cut its target for overnight interbank lending by three-quarters of a point, it lowered the discount rate again by a matching amount, to 2.5 per cent.