Emergency rate cut may show the Fed panicked

By Ros Krasny - Analysis

CHICAGO (Reuters) - The Federal Reserve's huge emergency interest rate cut on Tuesday smacked of panic from a central bank spooked by a global markets rout, and may have exposed deep concerns about the health of the U.S. economy.

Just a week before a scheduled two-day policy meeting, the Fed, the U.S. central bank, slashed rates as a sell-off in global equities extended into a second day and Wall Street looked poised for steep losses after a long holiday weekend.

The early-morning strike fueled worries from Fed watchers that the bank is too market-driven and sees itself as behind the curve in shoring up U.S. economic growth.

But it also may have revealed a view by the Fed that a bold stroke would prove most effective.

"My God, the Federal Reserve couldn't wait a week for their meeting? These guys are unbelievably reactive," said Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles, which manages assets worth $160 billion.

"Clearly they were forced by the markets into this move, which only impairs their credibility," Gundlach said.

Markets took Tuesday's cut in the Fed's benchmark lending rate, to 3.50 percent from 4.25 percent, as an interim step, with another move likely next week. After the previous four intra-meeting rate cuts since 1994, the Fed has cut rates again at the following monetary policy meeting.

The Fed's emergency conference call on Monday came as share markets around the globe were enduring a savaging while the U.S. market was closed for the Martin Luther King Jr. holiday.