Katie Allen and Graeme Wearden guardian.co.uk, Tuesday January 22 2008
A massive emergency cut in US interest rates was not enough to avoid fresh carnage on Wall Street this afternoon.
The US Federal Reserve had earlier stunned the markets with its 75 basis point cut to 3.5%, reacting to growing fears of a recession in the world's largest economy.
However it did not prevent a rush of selling when Wall Street opened an hour later. The Dow Jones industrial average plunged more than 400 points within minutes of the opening bell, and was down almost 4% at 11,679.
The FTSE continued its volatile ride today, and was up around 17 points, or 0.3%, at 5,595 after US trading began. Yesterday it plunged 5.5%, the biggest fall since 9/11.
The interest rate cut, which came ahead of the Fed's scheduled meeting next week, is the biggest in more than two decades and follows steep stock market sell-offs around the world.
The US central bank said it had taken the action in view of a weakening 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," it said in a statement.
"Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labour markets."
It promised to act in a "timely" manner if needed.
The Federal Open Market Committee had been due to convene next week, but brought its meeting forward after stock markets plunged in Europe and Asia yesterday, when Wall Street was closed for a holiday.
"The Federal Reserve has clearly decided that events in equity and credit markets, as well as the recent deterioration of macroeconomic data required decisive action," said Rob Carnell of ING.
He believes that further US rate cuts are a strong possibility.
Economists were split on the merits of the move, with some calling it a mistake but others suggesting it would bring calm to the markets.
Today's cut is bigger than any single intervention during the 1987 stock market crisis. It is the biggest reduction since 1984 when interest rates were chopped by 175 basis points.
In the statement, the committee said it had voted 8-1 in favour of the cut with one member absent. The lone dissenter, William Poole, did not believe that current conditions justified the action, it said.
The cut may add to pressure on the Bank of England to cut rates when it meets next month. A Bank spokeswoman said this afternoon that it has no intention of bringing this meeting forward.
The surprise interest rate cut did nothing to boost commodity prices, though. Copper fell to a three-week low despite the cut, as fears over a US recession more than over-shadowed the Fed's decision. Nickel, zinc and lead also fell. Analysts are still counting on strong demand from China and India to offset potential losses from the US if a recession does kick in, but in the short term, commodities are still being hit by general negative sentiment worldwide. Gold, however, bounced back from earlier lows after the Fed's cut.
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