Rate cut too small for many investors

NEW YORK – Wall Street plunged Tuesday after the Federal Reserve lowered interest rates by a quarter point, disappointing investors who hoped the central bank would move more aggressively to help the economy overcome the credit and mortgage crisis. The Dow Jones industrial average skidded more than 290 points.

Investors had been expecting policymakers would lower rates for a third straight time, though there was debate over the size of the cut. Most economists anticipated a quarter-point reduction in the benchmark federal funds rate to 4.25 percent — but some investors were hoping for a half-point cut from the Fed’s final meeting this year, and their disappointment took the market sharply lower.

Wall Street had barreled higher the past two weeks, propelling the Dow up 640 points partly on rising optimism that the Fed would do all it could to prevent the economy from slipping into recession. While the Fed indicated Tuesday it was doing exactly that, the market’s expectations had run well ahead of the central bank’s view of the economy and what it needed.

The Fed also lowered its discount rate, the interest it charges banks for loans, by a quarter point to 4.75 percent, making it easier for banks to obtain the cash they need for yearend obligations.

Fed officials did signal that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending worsen, but that was not enough to assuage the market.

Moreover, the central bank did note that the economy has suffered. The statement accompanying the Fed’s decision said “information suggests that economic growth is slowing,” and removed language from prior statements stating that risks to the economy are balanced. But the Fed seemed to stand firm on a quarter-point cut for now.

“Expectations may have been for a more meaningful move based on the swirl in the financial markets. But the Fed is acknowledging that maybe things on Main Street aren’t as bad as they are on Wall Street,” said Bill Knapp, economist and chief investment strategist for MainStay Investments, a division of New York Life Investment Management.

The Dow fell 294.26, or 2.14 percent, to 13,432.77 after dropping as much as 313.29.

Broader indexes also fell. The Standard & Poor’s 500 index fell 38.31, or 2.53 percent, to 1,477.65, and the Nasdaq composite index fell 66.60, or 2.45 percent, to 2,652.35.

Declining issues outpaced advancers by more than 5 to 1 on the New York Stock Exchange.