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The US Federal Reserve has cut its federal funds short-term interest rate by 0.75 per cent to 3.50 per cent as global financial turmoil continued over fears of a US recession.
The bank's action was the most dramatic signal it can send that it is concerned about a recession in the US and marked the biggest cut in recent history.
"The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth," the bank said in a statement.
The US market did not respond positively to the move with stocks falling sharply on Wall Street after markets opened there on Tuesday.
The Dow Jones, which opened at 1430GMT, fell around 300 points or 2.5% in early dealing.
"It is obviously a surprise but it seems the markets could not wait for the promised rate cut at the end of the month and neither could the Fed given the behavior of the markets over the last few days," said Kevin Logan, an economist at Dresdner Kleinwort Wasserstein in New York. European stock markets, which had dropped sharply on Monday and Tuesday, rose following the interest rate cut.
The UK's FTSE 100 closed up 161.9 points at 5,740.1, having fallen as much as 4.3 per cent earlier in the day.
Asian markets, which all fell substantially on Tuesday, closed before the announcement had been made.
Stimulus plan
It was the largest single shift in interest rates since November 1994, when the bank raised rates by three-quarters of a point. Asian markets: Tuesday's close
Tokyo Nikkei 225 -5.65% Hong Kong Hang Seng -8.7% Shanghai Comp. -7.2% Seoul Kospi -4.4% Taipei Taiex -6.51% Sydney S&P/ASX200 -7.1%
George Bush, the US president, last week announced a $145bn emergency plan in attempt to stimulate the economy.
On Monday, European markets appeared to have decided that the package was insufficent to prevent a looming recession in America.
Markets there fell, while US markets remained closed for Martin Luther King Day.
The markets have seen great volatility since last year when hundreds of thousands of low income US homeowners defaulted on loans which had been given out with little or no down payment.
The 'sub-prime' crisis led to US lenders such as Citibank and Merrill Lynch announcing in recent weeks that they had lost tens of billions of dollars.
That situation in the US has been compounded by higher unemployment rates, rising food prices and oil at around $100 a barrel.
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Tags: US Federal Reserve interest rates
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