In an effort to halt a massive stock sell-off and quell recession fears, the Federal Reserve executed an emergency rate cut today, slashing interest rates by 75 basis points just one week before its regular policy meeting.
The federal funds rates now stands at 3.5 percent, while the discount rate fell to an even four percent.
Commercial banks are also expected to follow suit and lower the prime rate to 6.50 percent, which is good news for home equity line holders.
“The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth,” the Fed said in a statement.
“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, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets,” the Fed said.
The move today marked the largest interest rate cut in more than 23 years and the biggest shift in interest rates since 1994, and came after the Dow fell 465 points at the start of this morning’s trading session.
The benchmark index nearly recovered after the news, but then slumped back down roughly 200 points.
And despite the emergency rate cut, investors believe the Fed could announce more cuts at its regular policy meeting on January 29-30.
“Appreciable downside risks to growth remain,” the statement said. “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 risk.”.
The action was approved on an 8-1 vote, with William Poole, president of the Fed’s regional bank, objecting because he didn’t feel conditions merited a rate move before the scheduled meeting next week.