WASHINGTON (Reuters) - A vicious rout of global stock markets at the start of the week sent the Federal Reserve scrambling to slash U.S. interest rates on Tuesday and the White House and Congress sped up work on tax cuts and other steps to ward off a possible U.S. recession.
Global equities pulled out of their nose dive after the Fed slashed its benchmark rate by three-quarters of a percentage point early on Tuesday. Wall Street, however, finished lower, although U.S. losses were far less severe than early in the day, while European shares closed higher.
U.S. treasuries prices, which tend to rise as interest rates fall, soared in anticipation the Fed will keep cutting rates to prop up the economy and as risk-averse investors shunned equities.
The Fed's cut in the federal funds rate, taking it to 3.50 percent, came a day after stock markets from Bombay to Frankfurt to Sao Paulo fell by as much as 10 percentage points on concern the slowing U.S. economy might drag down the rest of the world.
The U.S. central bank's rate cut, agreed at an emergency meeting, was the largest in more than 23 years. But some investors were skeptical the action would do enough to overcome the widening impact of a housing slump and credit crunch that have tipped many economic indicators lower.
"It's not going to necessarily turn this market around," said Joseph Battipaglia, market strategist at Stifel Nicolaus. Rates were lowered, he said, because "the Fed (is) coming to the realization the economy is moving lower, quicker."
U.S. stock markets that were closed on Monday for the Martin Luther King Jr Day holiday skidded in early trade, sending the Dow Jones industrial average down more than 300 points. But the Dow Jones pared losses to end down 128 points, still a fifth straight day of decline.
U.S. Treasury Secretary Henry Paulson and President George W. Bush met Democratic and Republican congressional leaders, and Bush said afterward he felt there was "common ground" for swift action. White House officials said Bush was open to a bigger stimulus plan than the roughly $150 billion package he proposed on Friday.
The White House said Bush was "not closing any doors" on negotiations over the size and details of the package.
BREATH OF RELIEF
Paulson said the rate cut "shows this country and the rest of the world that our central bank is nimble and can move quickly in response to market conditions." Paulson, appearing at a Chamber of Commerce breakfast, said he hoped the rate cut would be "a confidence builder" at home and overseas.
Some analysts had begun to criticize Fed Chairman Ben Bernanke and the policy-setting Federal Open Market Committee as being slow to react to the widespread view that the economy is rapidly weakening and said it might be forced to do more.
Fed policy-makers are to meet formally January 29-30, and on Tuesday futures markets were estimating prospects for another half percentage point cut at 72 percent. Dealers said they expect the Fed to slash rates to about 2.25 percent by mid-year -- a total of 300 points in easing within about a 10-month span. The Fed since mid-September has cut rates by a total of 175 points.
The economy's woes now are at the top of the issues list for Republicans and Democrats seeking their parties' presidential nominations for the November general election, a further complication for the Bush administration as it struggles to avoid having a recession become part of Bush's legacy.
WHAT RECESSION?
"We are not forecasting a recession. But clearly there is a slowdown," White House spokeswoman Dana Perino said when discussing plans meetings with congressional leaders.
A proposal gaining momentum in Washington would temporarily eliminate the lowest income tax bracket of 10 percent, increasing the amount of income not subject to federal tax. The tax would be returned in a rebate, resulting in tax returns of up to $800 for individuals and $1,600 for families.
Businesses would be allowed to take faster tax deductions for investments in new equipment and there might be extensions of unemployment insurance and more money for food stamps to help those hit hardest by a slumping economy.
Canada's central bank also cut its key lending rate on Tuesday by a quarter percentage point to 4 percent, but it appeared that other global central banks were keeping their powder dry for the time being.
There has been extensive cooperation among the central banks to pump liquidity into global financial markets -- necessary to periodically free up credit markets hit hard by a U.S.-originated subprime mortgage crisis that spilled over to other countries where less-than-sterling securities made up of the U.S. mortgages were sold.
Russell Jones, chief strategist for RBC capital markets, said the Fed's action looked more like "an admission of defeat, or rather misjudgment" and that won't encourage others to join. "Neither the ECB (European Central Bank) nor the Bank of Japan look ready to join."
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