Fed Cuts Funds Rate 75bps

The Federal Reserve on Tuesday morning cut its key lending rate by 75 basis points to 3.50% in reaction to a rout in global stock markets as well as a "softening" jobs market in the United States and a "deepening" housing contraction. The cut in the target federal funds rate also came on the heels of dismal fourth-quarter earnings reports by Bank of America and Wachovia showing that credit losses and provisioning cut earnings by more than 90% compared with the levels of a year earlier. "While strains in the short-term funding markets have eased somewhat, broader financial conditions have continued to deteriorate and credit has tightened further for some businesses and households," the Fed's monetary policy committee said in explaining the sudden rate cut. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in the labor markets." The Fed committee is scheduled to meet Jan. 30, and Fed watchers had been expecting a 50-bp cut based on Fed Chairman Ben S. Bernanke's comments that he will act aggressively to keep the U.S. economy growing. However, fears that the U.S. economy is already in recession swept Asian and European markets on Monday and Tuesday and sent stock prices sharply lower. This prompted the Fed to take quicker and more decisive action before the U.S. stock markets opened.