Fed slashes rates to 3.5%

Citing weakening economic outlook, Federal Reserve cuts key interest rates by three-quarters of a percentage point

January 22 2008: 8:48 AM EST

NEW YORK (CNNMoney.com) -- The Federal Reserve slashed two key interest rates by three-quarters of a percentage point Tuesday following an unscheduled meeting, citing continued concerns about a weakening economy and turmoil in the financial markets.

The Fed lowered its federal funds rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, from 4.25 percent to 3.5 percent. The Fed also lowered its discount rate, which is what it costs banks to borrow directly from the central bank, by three-quarters of a point, to 4 percent.

"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 Fed said in a statement.

Treasury Secretary Henry Paulson, speaking at the U.S. Chamber of Commerce in Washington Tuesday morning, said that he hoped the rate cut would restore some confidence in the financial markets and U.S. economy.

"I think it's very constructive and what I think it shows to this country and to the rest of the world [is] that our central bank is nimble and able to move quickly to respond to market conditions and that should be a confidence builder," he said.

Stock futures, which have been pointing to a gloomy start on Wall Street after market sell-offs abroad Monday, moved off their lows following the rate cut but were still sharply lower.

Wall Street had been betting that the central bank would need to initiate an emergency rate cut before its next scheduled meeting, which concludes on Jan. 30, in an attempt to help keep the economy from tipping into a recession.

Since September, the Fed has cut the fed funds rate from 5.25 percent to 4.25 percent. Investors have been clamoring for more, and bigger, rate cuts in the hopes that it will kick start a moribund economy and encourage businesses and consumers to spend.

The Fed has also loaned $70 billion to banks through a series of three auctions since December to help mitigate the effects of the credit crunch on Wall Street. That appears to be working as the Fed said Tuesday that "strains in short-term funding markets have eased somewhat."

President Bush and Congress are also working on an economic stimulus package in order to help beleaguered consumers. Federal Reserve chairman Ben Bernanke endorsed this plan during a speech to the House Budget Committee last week and urged Congress to act "quickly."

But markets have plunged so far in 2008 despite this as investors continue to fret that the Fed may be doing too little too late to keep the economy from recession.

Still, others think the Fed needs to proceed cautiously, especially since it's fair to argue that aggressive rate cuts during 2001 may be the reason why banks are in the subprime mortgage mess they are in now.