Fed slashes rates by 75 points

The US Federal Reserve slashed interest rates by 75 basis points on Tuesday - and hinted clearly at more cuts to come - in a bid to arrest the deterioration in the US economy and stem a wave of selling in world stock markets.

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The move down to 3.5 per cent was the first unscheduled Fed rate cut since September 17 2001 and its largest single cut since August 1982.

The central bank's gambit prompted an immediate rebound in European stocks but, while it helped arrest the slide on Wall Street - which had been closed during Monday's global equity route - even this action could not prevent the S&P 500 from closing 1.11 per cent lower.

The Fed had been planning to cut rates aggressively at its scheduled meeting on January 30, amid growing concern that it was behind the curve on monetary policy. But the global sell-off in world stock markets in recent days convinced Fed officials that they could not afford to wait another nine days.

In a statement, the US central bank said "appreciable downside risks remain" - a clear signal that it intended to bring rates down. Many analysts now expect a cut of 50 basis points on January 30.

Peter Hooper, chief economist at Deutsche Bank Securities, said the Fed's move was "unprecedented in magnitude and proximity to the next meeting".

Markets welcomed the move. In London the FTSE 100 was up 2.9 per cent, having initially fallen 240 points - 4.3 per cent - at the start of Tuesday's trading. The FTSE Eurofirst 300 was up 2.1 per cent, while Frankfurt's Xetra Dax had risen 0.1 per cent and in Paris the CAC 40 was up 2.1 per cent.

The cut came after a second day of heavy losses in the Asian markets. Japan's Nikkei 225 index accumulated its worst two-day decline in nearly two decades, losing more than 5 per cent. Shanghai closed down 7.2 per cent; Hong Kong fell 8.7 per cent and Mumbai 5 per cent.

An avalanche of sell orders at the start of New York trading initially overwhelmed the Fed's move, with Wall Street plunging nearly 4 per cent on its opening. But stocks regained some losses.

The emergency Fed action follows a sudden spate of bad economic data spanning housing, the jobs market and retail sales, which wrongfooted the Fed and suggested the US might be sliding into recession.

Officials decided on their move at a video conference at 6pm eastern US time on Monday, with one policymaker - Bill Poole, the president of the St Louis Fed - dissenting.

In a statement, the Fed said that while strains in short-term money markets had eased, "broader financial conditions have continued to deteriorate and credit has tightened further for some businesses and households". New information also indicated a "deepening of the housing contraction" and "some softening in labour markets".

The Fed pledged to act in a "timely manner as needed".

Ken Lewis, chief executive of Bank of America, said the Fed move "gives us a much better chance of avoiding recession and I'm very pleased they did it".

Hank Paulson, the US Treasury secretary, said the move was "very constructive".

The yield on the interest-rate sensitive two-year US Treasury note was at 2.11 per cent after reaching a low of 1.99 per cent, its lowest level since April 2004.