Fed delivers 3/4 point cut

By Mark Felsenthal and Christian Plumb

WASHINGTON/NEW YORK (Reuters) - The Federal Reserve slashed U.S. interest rates on Tuesday, boosting Wall Street, which was already higher on stronger-than-expected investment bank earnings.

Tuesday's three-quarters of a percentage point rate cut was less than the full percentage point many in the market had expected, but the Fed left the door open to an additional reduction. However, it noted its future action would take inflation concerns into consideration.

"A lot of people were hoping for a full percentage point, so a lot of people are probably disappointed," said Robert MacIntosh, chief economist at Eaton Vance Management, in Boston. "I don't think they should be. Inflation is an issue."

Global stock markets were up early in the day in anticipation of the Fed's move and on stronger-than-expected earnings news from Goldman Sachs Group Inc and Lehman Brothers Holdings Inc. By the end of U.S. trading, the Dow Jones industrial average jumped 420 points, or 3.5 percent, while the Nasdaq and S&P 500 indices rose more than 4 percent.

The dollar soared to its largest single-day gain against the yen in nine years and rallied against the euro as traders responded to the less-than-expected rate cut. But U.S. Treasuries fell as investors poured into stocks.

The Fed's action, taken on an 8-2 vote of its policy committee, was part of an intense effort by the central bank to avert a deep recession and financial market meltdown. The move took benchmark overnight rates down to 2.25 percent, the lowest since February 2005.

"The Fed's action is yet another forceful move in its attempts to alleviate the liquidity crunch and to shore up a rapidly weakening economy," said Arun Raha, a senior economist with Swiss Re, in New York.

"It clearly does not believe that the action it took last week to expand its securities lending program, or its emergency measures over the weekend to increase market liquidity, are enough. The economy is in, or close to, a recession, but increasing oil prices have kept inflationary pressures from abating, complicating the Fed's task."