Fed Slashes Key Rate

Updated from 8:51 a.m. EST

With financial markets around the world gripped by fear of an economic slowdown, the Federal Reserve took an extraordinary measure on Tuesday morning by slashing its key interest rate target by 75 basis points in an effort to calm investors and stabilize the markets.

The Fed had next been scheduled to convene at a two-day meeting beginning Jan. 29, but huge selloffs in overseas markets on Monday, while U.S. markets were closed, and an anticipated sharp decline in U.S. stocks at Tuesday's opening bell brought the central bank off the sidelines.

In a statement, the Fed hinted that it was prepared to ease further at its meeting next week, saying it "will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."

Finally, the Fed's Gotten Rational

The Fed's latest move brings the target fed funds rate to 3.5%, marking the first time it has cut rates by over 50 basis points at once since 1982.

"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," the Fed statement said. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

Fed Chairman Ben Bernanke has been criticized on Wall Street for moving slowly in easing rates as a global credit crunch engulfed financial markets beginning last summer. With Tuesday's action, his Fed has now cut its target by 1.75 percentage points since August, and its rate target now stands at its lowest level since August 2005.

Bernanke has faced difficulty in balancing the threat of a recession as a result of the U.S. housing slowdown against the risk of inflation with oil prices recently as high as $100 a barrel. The government's inflation gauges have consistently come in above the Fed's so-called comfort zone, raising the possibility that lowering rates to calm inflation fears now could have the disastrous result of stoking inflation later.

William Poole, president of the St. Louis Federal Reserve Bank, cast the sole dissenting vote to the action on the Federal Open Markets Committee. The Fed said Poole didn't believe that an intermeeting rate cut was justified.

The Fed also lowered the discount rate -- the rate at which the bank lends to other financial institutions -- by 75 basis points to 4%.

"Confidence is really beaten up here, and we're defensive -- focusing mainly on capital preservation right now," says Peter Dunay, chief market strategist with Leeb Capital Management. "Stimulus from the Fed is supposed to stabilize the economy. At this point, we're waiting for evidence that the Fed could actually accomplish that."

The U.S. stock market has been choppy since the credit crisis began last summer and investors began to comprehend the scope of economic fallout from the downturn in the housing market. Last week, heavy selling began in earnest as major Wall Street financial institutions like Citigroup(C) and Merrill Lynch (MER) posted heavy fourth-quarter losses and billions in writedowns on mortgage-related investments.

The disarray in the financial sector continued on Tuesday with disappointing earnings declines from Bank of America (BAC) and Wachovia (WB).

Cramer: This Fed Is Stupid

Major stock indices rebounded from deep lows early in the session on the Fed's announcement, but the Dow Jones Industrial Average was still recently off 1.7%. The S&P 500 was down 1.8%, while the Nasdaq Composite was off 2.2%.

Meanwhile, highflying shares of Google(GOOG) were recently down 2%, while its tech rival, Apple (AAPL), dropped 2.9% ahead of its fourth-quarter earnings scheduled for after the closing bell.