Updated from 8:51 a.m. ESTWith 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."
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After the Fed's announcement, fed funds futures showed that investors are looking for the rate to be lowered another 75 basis points to 2.75% by mid-March. On the fiscal side of things, President Bush and congressional Democrats promised last week
to compromise quickly on a fiscal stimulus package designed to head off recession by providing U.S. consumers with extra spending power. Investors have shown little enthusiasm for the prospects of success for such an effort. Bernanke testified in support of fiscal stimulus in Congress amid a stock market selloff Thursday. On Tuesday, the Bush administration offered support for the Fed's move.
"This is very constructive, and I think it shows this country and the rest of the world that our central bank is nimble and can move quickly in response to market conditions,'' Treasury Secretary Henry Paulson said following the announcement.
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