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Fed moves boldly against slide

WASHINGTON — Federal Reserve Chairman Ben Bernanke averted a Black Tuesday on Wall Street, heading off what had seemed certain to be a massive stock sell-off with an unprecedented cut to the Fed’s benchmark lending rate of three-quarters of a percentage point, to 3.5 percent.

After falling more than 460 points, the Dow Jones Industrial Average clawed back to close down 128.11 points at 11,971.19. The S&P 500 finished down 14.69 points at 1,310.50, and the tech-heavy NASDAQ was down 47.75 points to 2,292.27.

The Fed already had signaled that it would make deep rate reductions when its rate-setting committee meets Jan. 29-30, but huge percentage declines in European and Asian stock markets Monday — while U.S. markets were closed for the Martin Luther King Jr. holiday — led the Fed to announce its bold cuts Tuesday morning.

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

The Fed’s action was the first such cut between meetings since Sept. 17, 2001, the week after the Sept. 11 terrorist attacks. Before Tuesday’s action, the Fed had cut rates between meetings only four times: three times in 2001 and once in October 1998 amid a currency crisis in Asia and Russia.

In its statement, the Fed left open the possibility that it could reduce rates further when it meets next week, and many stock analysts began forecasting another half-point cut days from now.

“Appreciable downside risks to growth remain. The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks,” the Fed said.

The Fed’s bold action made good on signals by Bernanke to move aggressively if events warranted it.

“The timing was certainly affected by an equity-market meltdown, based on what happened the previous day,” said Lawrence Meyer, a Fed governor from 1996 to 2002 who thought the move decisive. “If you’re going to do it, you don’t want to come up short.”

Because the benefits of rate reductions aren’t felt immediately, the full effect of the Fed’s action won’t be known for months. The immediate effects were psychological, helping to put confidence into global stock markets that were losing it.

“This is a mass psychology phenomenon,” said Alice Rivlin, a former Fed vice chairman and Fed governor from 1996 to 1999.

Not only did the Fed’s action provide a cushion for what could have been a far steeper fall in U.S. stocks, it also put wind back in the sails of overseas exchanges.

The Fed action reversed a slide in Europe, and in Brazil, one of the important developing nations that are helping to power the global economy. Brazil’s Bovespa rose 4.45 percent Tuesday after falling 6.6 percent Monday.

Similarly, in Mexico, an economy deeply linked to U.S. economic activity, the Bolsa fell 5.3 percent Monday, but in late-day trading Tuesday had gained 6.1 percent.

When the U.S. economy sneezes, the Mexican economy catches cold. A U.S. recession would lead to even deeper economic problems in Mexico and most likely would spur greater illegal immigration. Even if there were fewer U.S. jobs, the employment picture most likely would be worse in Mexico.

The trigger for the global stock sell-off was fears that the U.S. economy was heading into recession and a belief that the economic stimulus plan that President Bush and Congress are negotiating will be too little, too late.

Seeking to put those views to rest, Bush met with congressional leaders Tuesday afternoon at the White House to discuss a stimulus plan, calling the economy fundamentally sound.

“Everybody wants to get something done quickly, but we want to make sure it gets done right,” Bush said before the meeting with House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev.

Reid promised a stimulus plan within three weeks.

Everyday Americans have a large stake in Wall Street’s plunge or rebound.

Millions of Americans depend on the stock market, through their 401(k) plans, for their retirement income. A falling stock market amounts to declining wealth, in the short run at least, and comes on top of rising consumer inflation — which measured 4.1 percent last year — and sky-high energy prices.

For all that the Fed cut will do, there’s plenty that it won’t do. It won’t be much immediate help for the housing sector, the root of today’s economic problems. Homebuilders must sell off their oversupplies of new homes before they can see a rebound. And mortgage rates aren’t influenced by the Fed’s rate action but by yields on long-term bonds, which take their cue from the economy and inflation, neither of which looks good right now.

INSIDE

•Economists optimistic about our area; cast doubt on recession fears, Page 1C

•What does the rate cut mean for you? Page 1C

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