Interest-Rate Cut Helps Markets Rein In Losses

Traders went to work Tuesday on Wall Street with plenty to worry about. As fears about a possible U.S. recession were spreading around the world, a huge sell-off on foreign stock exchanges began Monday while U.S. markets were closed for the holiday.

Then, shortly before trading got under way Tuesday, the Federal Reserve announced a surprise cut in interest rates. It all made for a wild ride on Wall Street. The Dow plummeted early, then regained some of the lost ground and finished down 128 points.

As the day broke on U.S. stock markets, fears that there would be panic-selling by U.S. investors were foremost. They'd already weathered the worst January in U.S. market history. Futures markets suggested that U.S. indexes could loose another 5 percent Tuesday on top of the nearly 20 percent they'd already lost since the market peaked last October.

Before the market opened, Secretary of the Treasury Henry Paulson tried to reassure investors in a breakfast speech to the Chamber of Commerce in Washington, D.C. He expressed confidence that President Bush and Congress shared a sense of urgency about passing an economic stimulus package to head off recession.

As Paulson continued his speech, an even bigger economic player made a move. The Federal Reserve said it was making a three-quarters-of-a-percentage-point rate cut because of continued deterioration in the financial markets and a weakening economy.

It was the largest single cut since the federal funds rate became the Fed's principle tool for monetary policy — bigger than the one after the Sept. 11, 2001, attacks and after the 1987 market crash.

In the first few minutes after the opening bell Tuesday, the market plummeted more than 460 points despite the Fed's forceful action. But almost immediately investors started clawing their way back. Just after 10 a.m., the Dow Jones industrial average had recovered about half of its initial loss.

Some of the most distressed shares — such as stocks in financial companies that were participants in the subprime debacle — will be among those that benefit most from the Fed's big rate cut. Retailers will benefit, too, and their shares also helped the market recover Tuesday.

In the end, the Dow finished down 128 points — 336 points above its low for the day. It's a testament to the market's problems that this outcome is viewed as something of a victory.

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