Fed slashes rates

By David Lawder

WASHINGTON (Reuters) - The U.S. Federal Reserve on Tuesday slashed a key interest rate by the biggest amount in more than 23 years in an emergency bid to head off a U.S. recession and halt a global rout in stocks.

In a rare action between regularly scheduled meetings, the U.S. central bank cut the benchmark federal funds rate by three-quarters of a percentage point to 3.5 percent, its lowest level since September 2005.

The Fed also signaled it stood ready to lower rates further to deal with "appreciable" downside risks to growth, and financial markets saw a good chance that policy-makers would take rates down by another half point at its next scheduled meeting on January 29-30.

"The Fed is very, very, very worried," said John Tierney, an analyst at Deutsche Bank in New York.

The Fed's bold bid before U.S. markets opened -- which some analysts said smacked of panic -- helped instill a bit of confidence in shaken financial markets, but did not stop U.S. stocks from sliding.

The Dow Jones industrial average initially plummeted 465 points but clawed back to just about 130 points, or 1.1 percent, down by midafternoon. European shares, which suffered big losses on Monday when U.S. markets were shut, closed higher.

Tuesday's action was the biggest cut in the federal funds rate, which governs overnight lending between banks, since October 1984. The Fed also lowered the discount rate it charges on direct loans to banks by a matching amount to 4 percent.

"The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth," the Fed said, referring to its policy-setting Federal Open Market Committee.