Rate cut helps reverse early free-fall

NEW YORK – An unusual emergency interest rate cut by the Federal Reserve gave Wall Street a partial rebound Tuesday from a precipitious early decline – and perhaps the first steps toward a long-term recovery. The rest of the comeback, for the economy as well as the stock market, may depend on a turnaround in the battered housing market and renewed confidence among U.S. consumers.

The Dow Jones industrial average, down 465 points shortly after trading began, bounced around throughout the session before closing with a milder drop of 128.11, or 1.06 percent, at 11,971.19, according to preliminary calculations.

U.S. stocks began the day following the lead of markets abroad that had plummeted for two straight days, and also extended their own steep losses from last week. Fears of a U.S. recession – one that would spread to other economies – had investors fleeing stocks worldwide.

The Fed, in a step anticipated by many traders, moved before the opening of trading, cutting its benchmark federal funds rate by 0.75 percentage point to 3.50 percent and the discount rate, the interest the Fed charges banks directly, to 4 percent. The fact stocks didn’t continue their steep plunge – the Dow fell 277 points on Tuesday and 307 on Thursday – was a positive sign, but economists and analysts said a full recovery wasn’t likely in the near term.

One of the market’s greatest concerns is that consumers, who normally account for two-thirds of the economy, aren’t in a position to spend the country back into solid growth. Even if rates continue to fall, Americans have been showing increasing signs of cutting back rather than borrowing or spending, even during the holiday season.

“People are up to their eyeballs in debt, and they’re being asked to borrow more,” said Mike Schenk, senior economist for the Credit Union National Association.

But a rate cut tends to spur the economy by making it cheaper for businesses to borrow money. It would also lighten the burden on people with credit card debt and mortgages that have adjustable rates.

Still, its effect on Wall Street wasn’t overwhelmingly positive. The Standard & Poor’s 500 index, the broad market measure most closely followed by traders, fell 14.69, or 1.11 percent, to 1,310.50, while the Nasdaq composite index lost 47.75, or 2.04 percent, to 2,292.27.

European stocks joined their U.S. counterparts in rebounding after the Fed’s rate reduction. Britain’s FTSE 100 rose 2.90 percent, France’s CAC-40 rose 2.07 percent, Germany’s DAX index pared its loss to 0.31 percent.

In Asian trading, which ended before the Fed move, Japan’s Nikkei stock average closed down 5.65 percent – its biggest percentage drop in nearly a decade. Hong Kong’s Hang Seng index lost 8.65 percent a day after showing its biggest losses since the Sept. 11, 2001, attacks.