The Federal Reserve, responding to an international stock sell-off and the likelihood of a sharp drop in America on Tuesday morning, cut its benchmark interest rate by three-quarters of a percentage point.
The Federal Open Market Committee lowered its target for the federal funds rate on overnight loans between banks to 3.5 percent, from 4.25 percent.
In a statement, the Fed said: “The committee took this action in view of a weakening of the 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.”
“Moreover,” the statement continued, “incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”
In a related action, the Fed approved a 75 basis-point decrease in the discount rate, to 4 percent.
Within minutes after the announcement, trading in stock-index futures, which had been presaging a deep slide on American stock exchanges Tuesday, retraced much of their earlier declines, which had been driven by a second sour day in Asia and Europe.
Stock markets across Asia plunged even farther and faster on Tuesday than they had on Monday, as anxious sellers dumped huge numbers of shares on worries that an economic slowdown in the United States could drag down growth around the world.
The European stock markets initially followed their Asian counterparts lower, plunging at the opening and then see-sawing back and forth in frenzied trading as investors looked to the start on Wall Street for direction. After the Fed announcement, they had made up those losses and moved into positive territory. But the rate cut was too late for Asian markets, which had already closed.
A decade after a credit crisis in Southeast Asia triggered an “Asian contagion” of stock market declines around the world, the credit crisis in the United States is now producing an “American contagion” to which no stock market seems immune.
Heavy selling hit each Asian and European stock market as soon as it opened. Some of Asia’s easternmost exchanges, which had closed on Monday before the sharpest declines occurred in India and then Europe, suffered particularly steep drops.
