Fed Slashes Interest Rate to 3.5%

In an emergency move, the Federal Reserve Tuesday cut the key U.S. interest rate by three-quarters of a point to 3.5%, the Associated Press reported.

The surprise reduction in the federal funds rate from 4.25% marked the biggest one-day rate move by the central bank since it cuts its discount rate by 1% in December 1991, when the country moving out of a recession, AP reported.

Analysts said the Fed will likely delay cutting rates further at its meeting Jan. 29-30, but will likely keep moving rates down aggressively as the economy continues to weaken, AP said.

Following is the statement released by the Federal Reserve:

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3.5%.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.  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.  Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain.  The Committee 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.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh.  Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.