Fed Slices Interest Rate by 0.75%, Possible Sign of Panic

Ken Sweet

FOXBusiness

New York -- The Federal Reserve’s emergency decision to slash a key interest rate three-quarters of a percentage point -- the most in recent memory -- is seen by some as a panic-stricken attempt to add spark to an economy slipping into recession.

“The Fed is responding to a panic,” said Quincy Krosby, chief market strategist at The Hartford. “They are reacting to a market sell off that is based on out-and-out fear and lack of confidence in the markets. We should have had this cut weeks ago.”

The move came a week ahead of the bank’s regularly scheduled meeting and in response to a global market sell off and a 9% drop in the U.S. stock market year-to-date – the worst start ever for U.S. equities.

“The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth,” the Fed said in a statement. “Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.”

Many on Wall Street believe the Federal Reserve has been behind the curve as the economy has been careening toward recession.

Fed Chairman Ben Bernanke told Congress last week that the U.S. will not slip into a recession but instead will head into a period of slow economic growth for the first half of 2008. However, economists at firms such as Goldman Sachs and Merrill Lynch say we are already in one or heading toward one.

"Investors have been talking about this damage to the economy for weeks, and now the Fed is catching up," Krosby said.

The Fed holds their regular Open Market Committee Meeting on Jan. 29-30, and many believe additional cuts are needed and likely.

"This move is not an instant fix," Ian Shepherdson, chief U.S. economist at High Frequency Economics told the Associated Press. "The economy is still staring recession in the face, but at least the Fed now gets it."

Tuesday's Fed's action was approved 8-1 with William Poole, president of the Fed's regional bank, dissenting. The statement said that Poole objected because he did not believe current conditions justified a rate move before the Fed's meeting next week.