Fed slashes rates to halt sell-off

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.

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 a rebound in European stocks on Tuesday and in Asia early on Wednesday but, while it helped arrest the slide on Wall Street, it did not prevent the S&P 500 from closing lower.

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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 intends to lower rates again, with another cut likely on January 30.

Peter Hooper, chief economist at Deutsche Bank Securities, said the Fed's move was "unprecedented".

However, Jim O'Neil, chief economist at Goldman Sachs, said the US central bank would have to follow up with a 50 basis point cut on January 30 if it wanted to be "material" and "ahead of the curve".

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 yesterday. Shanghai closed down 7.2 per cent; Hong Kong fell 8.7 per cent and Mumbai 5 per cent.

Markets welcomed the Fed 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 gained 0.1 per cent and in Paris the CAC 40 was up 2.1 per cent.

Wall Street, which was closed during Monday's global equity rout, fell nearly 4 per cent in early trading as an avalanche of sell orders initially overwhelmed the Fed's move. However, the S&P 500 recovered to close 1.1 per cent lower at 1,310.50

Japan's Nikkei 225 surged 3 per cent in early morning trading on Wednesday, while Korea's Kospi index was 2.7 per cent higher. The Hong Kong Monetary Authority followed the Fed's move and cut its base rate by 75 basis points to 5 per cent.

The emergency Fed action represents an urgent effort by the US central bank to get to grips with the rapidly worsening economic outlook. It follows a sudden spate of bad economic data that wrongfooted the Fed and suggested the US might be sliding into recession.

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

In its statement, the Fed said it acted "in view of a weakening of the economic outlook and increased downside risks to growth".

Ken Lewis, chief executive of Bank of America, said the Fed move "gives us a much better chance of avoiding recession".

The yield on the US Treasury two-year note fell 33 basis points to 2.01 per cent, while the inflation compensation on inflation-protected securities edged up.